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Tax Heterogeneity and Misallocation

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  • Barış Kaymak
  • Immo Schott

Abstract

Companies face different effective marginal tax rates on their income. This can be detrimental to allocative efficiency unless taxes offset other distortions in the economy. This paper estimates the effect of tax rate heterogeneity on aggregate productivity in distorted economies with multiple frictions. Using firm-level balance-sheet data and estimates of marginal tax rates, we find that tax heterogeneity reduces total factor productivity by about 3 percent. Our findings highlight the positive correlation between marginal tax rates and other distortions to capital and especially labor. This implies that tax rate heterogeneity exacerbates the distortionary effects of other frictions in the economy.

Suggested Citation

  • Barış Kaymak & Immo Schott, 2023. "Tax Heterogeneity and Misallocation," Working Papers 23-33, Federal Reserve Bank of Cleveland.
    • Handle: RePEc:fip:fedcwq:97473
    DOI: 10.26509/frbc-wp-202333
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    More about this item

    Keywords

    business taxation; aggregate productivity; TFP; misallocation;
    All these keywords.

    JEL classification:

    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence

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