Working Paper

Tax Heterogeneity and Misallocation

Abstract: There is substantial asymmetry in effective corporate income tax rates across firms. While tax asymmetries would reduce productivity in frictionless economies, they can improve efficiency in a distorted economy if taxes alleviate other economic frictions. We develop a framework to estimate to what extent tax asymmetries affect productivity in distorted economies. Using US firm-level balance sheet data alongside measures of effective marginal tax rates, we find a positive correlation between tax rates and factor productivity, suggesting that tax asymmetry exacerbates the distortions from other economic frictions. Eliminating tax rate asymmetries would raise aggregate productivity by 3 to 4 percent if taxes distort capital costs alone. Models where taxes also distort the marginal cost of labor predict potential gains as high as 9 percent.

Keywords: Business Taxation; Aggregate Productivity; TFP; Misallocation;

JEL Classification: E23; H25; O47;

https://doi.org/10.17016/IFDP.2024.1393

Bibliographic Information

Provider: Board of Governors of the Federal Reserve System (U.S.)

Part of Series: International Finance Discussion Papers

Publication Date: 2024-07-19

Number: 1393