Ábrahám, Árpád and Gottardi, Piero and Hubmer, Joachim and Mayr, Lukas (2023) Tax Wedges, Financial Frictions and Misallocation. Journal of Public Economics, 227. p. 105000. DOI https://doi.org/10.1016/j.jpubeco.2023.105000
Ábrahám, Árpád and Gottardi, Piero and Hubmer, Joachim and Mayr, Lukas (2023) Tax Wedges, Financial Frictions and Misallocation. Journal of Public Economics, 227. p. 105000. DOI https://doi.org/10.1016/j.jpubeco.2023.105000
Ábrahám, Árpád and Gottardi, Piero and Hubmer, Joachim and Mayr, Lukas (2023) Tax Wedges, Financial Frictions and Misallocation. Journal of Public Economics, 227. p. 105000. DOI https://doi.org/10.1016/j.jpubeco.2023.105000
Abstract
We revisit the classical result that in a closed economy the incidence of corporate taxes on labor is approximately zero. We consider a rich general equilibrium framework, where agents differ in the level of wealth as well as in their managerial and working ability. Potential entrepreneurs go through all the key decisions affected by corporate tax changes: the choice of (i) occupation, (ii) organizational form, (iii) investment, and (iv) financing structure. We allow both for the presence of financial frictions and the traditional tax advantage of debt over corporate equity, which jointly generate misallocation of capital and talent. In this environment we characterize the effects of increasing corporate taxes both analytically and for a calibrated version of the model. We show that this tax increase reallocates production from C corporation to pass-through businesses. Since, due to distorted prices, the latter have higher capital-labor ratios, this reallocation generates a reduction in labor productivity and wages. Furthermore, the corporate tax increase induces some C corporations to reorganize as pass-throughs, which implies more restricted acess to external funds and thus a socially inefficient downsizing of production in these firms. Finally, the tax increase causes further misallocation of talent by inducing agents with low wealth relative to their managerial talent to switch from entrepreneurship to being workers, while the reverse happens for agents with higher wealth and lower managerial skills. Overall, we find that both labor and capital bear a large share of the corporate tax incidence, while entrepreneurs are net beneficiaries of the tax change.
Item Type: | Article |
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Uncontrolled Keywords: | Corporate taxation; Tax incidence; Heterogeneous agents; General equilibrium |
Divisions: | Faculty of Social Sciences Faculty of Social Sciences > Economics, Department of |
SWORD Depositor: | Unnamed user with email elements@essex.ac.uk |
Depositing User: | Unnamed user with email elements@essex.ac.uk |
Date Deposited: | 03 Oct 2023 11:35 |
Last Modified: | 30 Oct 2024 16:13 |
URI: | http://repository.essex.ac.uk/id/eprint/36348 |
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