Firms with Heterogeneous Profitability: An Argument for "Pick-the-Winner" Strategies in Tax and Industrial Policies?
Project Leader
Department
Economics
Participating Scientists
Frank Stähler (Tübingen), Horst Raff (Kiel), Ian Wooton (Strathclyde University, Glasgow)
Project Summary
The goal of this research project is to analyze the implications of differences in the productivity and profitability of firms for tax and industrial policies. Our objective is twofold. First, by exploiting the effects of firm heterogeneity, we aim at achieving a better understanding of the link between tax policies, firm behaviour, and tax revenues. Second, we ask if heterogenous firm models, which predict the endogenous selection into exporting and FDI according to a firm's productivity level, provide new arguments for discriminating strategies in tax and industrial policies. Such "pick the winner" strategies abound in practice, but they cannot reasonably be motivated by existing models, which typically treat firms as homogenous with respect to their productivity.
We analyze two issues within this project. The first question is whether the factual preferential tax treatment of multinational companies can be explained by the fact that these firms are, on average, more productive than nationally operating firms. More specifically, to what extent can recent tax-rate-cut-cum-base-broadening reforms in many OECD countries be explained as an attempt of optimizing governments to attract the most profitable firms, which gain relatively more from lower tax rates than from generous deductions from the tax base? The second question is whether subsidizing "national champions" can be explained as the optimal policy response in an environment with profit heterogeneity.
Term
2010 - 2012
Research Results
- Bauer, Christian / Davies, Ron / Haufler, Andreas (2014): Economic integration and the optimal corporate tax structure with heterogeneous firms. Journal of Public Economics 110, 42-56
- Haufler, Andreas / Stähler, Frank (2013): Tax competition in a simple model with heterogeneous firms: How larger markets reduce profit taxes. International Economic Review 54, 665-692
- Langenmayr, Dominika / Haufler, Andreas / Bauer, Christian (2014): Should tax policy favor high- or low-productivity firms? European Economic Review, forthcoming