The tax advantage of public firms over private firms in the German household solid waste disposal industry

We measure the tax advantage of public firms over private firms, which operate at municipality level in the German household solid waste disposal industry. Public firms with sovereign duties pay no taxes, but equivalent private firms have to. In a simple risk-free setting, we develop a measure of the percentage difference of the charges of both types of firms demanded under their respective tax treatments. We model a cost-covering public firm and a net present value maximizing private firm. For sensible model parameters from the German waste disposal industry the private firm has to demand an about 16% to 18% higher charge. The by far biggest impact on the measure has the value added tax, with revenues as a much larger tax base than profits. Tax savings, which directly affect pre-tax profits, only alleviate the disadvantage bit. There is some evidence that at least one type of private firms—that is, private law firms that are also majority privately owned, are productive enough to overcome the tax advantage of public firms and be able to charge a lower price than public firms.     

The evasion of fiscal and labor regulations: Firm behavior and optimal tax policy

Firms face many fiscal and labor regulations, but they may evade these legal requirements in several different ways. We develop a model that captures these two types of evasion decisions and unlike existing literature assume firms can evade labor regulations independently from income tax responsibilities. We characterize firms’ entry and evasion behavior and find that the design of the tax system can generate both positive and negative correlations between evasion decisions consistent with what is observed empirically. We then characterize optimal government policies given the firms’ decisions. We obtain intuitive optimal tax rules that highlight the trade‐offs the government faces when firms have multiple margins on which to evade.     

R&D policy in a vertically related industry

In this paper, we analyze the effectiveness of public policy aimed to stimulate business-performed R&D in a vertically related market. We examine the role of an R&D active upstream supplier in a four-stage R&D model, where we incorporate public funding. The considered policy instrument is direct funding of firms’ R&D efforts. We calculate the optimal policies and show that they have a positive impact on firms’ R&D investments. From a welfare point of view, it is optimal to differentiate the subsidy rates between the upstream and the downstream markets. Competition in the product market leads to a higher subsidy rate to the upstream supplier than to the downstream firms. When concentration is high in the downstream market, the optimal solution is an R&D subsidy for these firms, otherwise the optimal solution is an R&D tax for the downstream firms.     

Has liberalization affected profit margins in Indian Industry?

In this article, we analyse the determinants of firm‐level profit margins in Indian manufacturing. The model we estimate is rich in its dynamic characterization allowing as it does for lagged terms, trend movements, business cycle effects and a structural break in 1991. We hypothesize that the reforms undertaken by the government in 1991 constitute a structural break that influences a firm's independence to react to other firms as well as the extent of competition faced by these firms. Inserting this into the standard industrial organization model of profits, we obtain a dynamic market model. Estimating this model for 1980–98, we find that the 1991 reforms did have a significant impact on profit margins in Indian industry. The reforms have worked through their impact on a firm's behavioural variables – advertising, Research and Development (R&D), capital–output ratios and managerial remuneration – though the precise variables that were significant varied from sector to sector. We find that relatively inefficient firms make significantly lower profits than others both before and after the liberalization as expected.     

Why is the corporate tax rate lower than the personal tax rate?: The role of new firms

In many OECD countries, statutory corporate tax rates are lower than personal income tax rates. This tax rate difference is often particularly large for small firms. The present paper argues that a reduction of the corporate tax rate below the personal tax rate is an optimal tax policy if there are problems of asymmetric information between investors and firms in the capital market. The reduction of the corporate tax rate below the personal tax rate encourages equity financing and thus mitigates the excessive use of debt financing induced by asymmetric information. Our main theoretical result stands in marked contrast to the traditional view of corporate taxation and corporate finance theory, according to which there is a tax disadvantage to equity financing. More recent empirical evidence on this issue, however, is in line with our result.     

Corporate Taxation and Productivity Catch‐Up: Evidence from European Firms

In this paper, we explore whether higher corporate tax rates, because they lower the after‐tax returns to productivity‐enhancing investments, reduce the speed with which small firms converge to the productivity frontier. Using data for 11 European countries, we find evidence that their productivity catch‐up is slower when the statutory corporate tax rates are higher. In contrast, we find that large firms are instead affected by effective marginal rates. Using the reduced‐form model of productivity convergence of Griffith et al . (2009, Journal of Regional Science 49 , 689–720), our results are robust to a host of robustness checks and a natural experiment that exploits the 2001 German tax reforms.     

Investment incentives and corporate tax asymmetries

Recent facts on the importance of corporate losses motivate more careful study of the impact of tax incentives for investment on firms that lose money. I model firm investment decisions in a setting featuring financing constraints and carrybacks and carryforwards of operating losses. I estimate investment responses to tax incentives allowing effects to vary with cash flows and taxable status. Results suggest that asymmetries in the corporate tax code could have made recent bonus depreciation tax incentives at most 4% less effective than they would have been if all firms were fully taxable. Cash flows have more important effects on the impact of tax incentives. Recent declines in cash flows would predict a 24% decrease in the effectiveness of bonus depreciation. Results thus suggest that tax incentives have the smallest impact on investment exactly when they are most likely to be put in place — during downturns in economic activity when cash flows are low.     

Piecemeal Multilateral Environmental Policy Reforms under Asymmetric Oligopoly

We develop a general two‐country model with oligopolistic interdependence in which a fixed number of firms make their output and emission decisions simultaneously. We examine the effect of multilateral reforms of emission taxes on global emission levels. With sufficient asymmetry in pollution intensities between the two countries, a proportional multilateral increase in emission tax rates can increase global emission levels. However, a multilateral equal increase of emission tax rates unambiguously reduces global emission levels. We also consider the case of free entry and exit of firms, and find a rule of multilateral reforms which unambiguously lowers total emission levels.     

Optimal policy for environmental goods trade in asymmetric oligopolistic eco-industries

In this paper, we examine the optimal structure of an environmental tax to pollution, a production subsidy to a domestic eco-industry, and an import tariff on environmental goods (EGs) in a two-country model where the home country imports EGs from the foreign country. Home and foreign firms that produce EGs engage in Cournot competition. We then assume that the number of the home local firms which produce EGs is constant, but that of the foreign firms is variable. Our main findings are as follows: (I) The optimal environmental tax level may be lower than the Pigouvian level even if the tax has a positive impact on the output of EGs produced by a domestic firm. (II) The optimal tariff level may be positive when the country implements the first best policy combination in a closed economy regarding the environmental tax and the subsidy. (III) The optimal subsidy level may be positive, and then the subsidy may be substitutive for the import tariff on EGs.     

Using surveys of business perceptions as a guide to growth‐enhancing fiscal reforms

This paper assesses the merits of using business perceptions of growth constraints as a guide to growth‐enhancing fiscal policy reforms. Using endogenous growth models in which the government levies an income tax to provide public inputs to the production of private firms, the paper demonstrates that such perceptions of growth constraints may be misleading from a policy perspective. In particular, firms can be expected to systematically overestimate the growth‐enhancing effects of lower tax rates relative to public services and public capital, and underestimate the growth‐enhancing effects of greater provision of public capital relative to taxation and public services. In addition, we show that firms rank different public services and different types of public capital according to the actual costs they impose on firms. It is then shown that these theoretical predictions regarding how firms rank constraints correspond closely to the observed ranking of constraints by firms in the World Bank's Enterprise Surveys.     

Environmental Policy with Endogenous Technology from a Game Theoretic Perspective: The Case of the US Pulp and Paper Industry

The merits of different types of regulatory tools in eliminating pollution and at the same time inducing innovation have long been an interest of researchers in both environmental economics and industrial organization. Although there is a substantial theoretical literature investigating the potential for various environmental policies to attain these dual goals, this is a challenging empirical problem because every industry has its own inherent characteristics that play an important role in determining the performance of different regulatory tools. The majority of the work to date focuses on pollution abatement while leaving pollution prevention understudied. In most of the literature firms are also assumed to be symmetric. Asymmetries among firms add another degree and level of complexity to their strategic interactions, and affect the performance of different regulatory tools. This paper investigates the performance of two alternative regulatory tools, an emissions performance standard and an emissions tax, in reducing pollution and inducing pollution prevention and abatement R&D in the US pulp and paper industry. We construct a model representing the industry in an asymmetric Cournot duopoly framework, calibrate the model to disaggregated industry data, and run scenarios to replicate the behavior of the firms in an imperfectly competitive output market. Our results suggest that pollution prevention R&D can respond quite differently than abatement R&D to different policy instruments. The results indicate that R&D spillovers among firms play crucial role in technology development and strategies of the firms. Our results also suggest that strategic interactions between firms in an imperfectly competitive industry can have significant impacts of the levels of both types of R&D.      

Tax cuts and enterprises’ R&D intensity: Evidence from a natural experiment in China

This paper studies the impact of tax cuts on enterprises’ R&D intensity. We use a natural experiment involving China’s business tax changing to value-added tax (“BT to VAT”) to identify any causality. The results reveal that this tax reform has prompted enterprises to increase their research and development (R&D) investment. Specifically, a stronger ability to transfer tax, results in this change having a more significant promotional effect on enterprises’ R&D intensity. Further analysis demonstrates that firms with different ownership types and in different industries respond differently to the “BT to VAT” policy. Our findings are only significant for non-state-owned and other modern service enterprises. This paper provides a theoretical and empirical basis for detailed analyses of the effects of “BT to VAT” policy, particularly the government’s subsequent improvement to the tax reform policy, to further stimulate enterprise investments in R&D as well as industrial upgrading.     

Shift from gross profit taxation to distributed profit taxation: Are there effects on firms?

This paper investigates the consequences of the corporate tax reform in Estonia in 2000. This unique reform nullified the taxation of retained earnings and maintained corporate income tax only on distributed profits. We investigate the outcome of the reform by comparing the performance of the affected firms in Estonia with that of firms from Latvia and Lithuania, the two other Baltic countries. We use firm-level financial data and the difference in differences approach for our analysis. The results are consistent with an increase in holdings of liquid assets and lower use of debt financing after the reform. A positive relationship of the reform with post-reform investment and productivity has also been found. The results point to a stronger effect on smaller firms.     

Optimal nonlinear income taxation with a finite population

In the standard optimal income taxation problem, tax payments depend only on each consumer's own actions. Piketty [J. Econ. Theory 61 (1993) 23-41] shows that, if one individual's tax schedule depends on others’ actions and the government knows the exact ability distribution, it can implement any undistorted allocation as the unique revelation game outcome. If some individuals misreveal their types, Piketty's mechanism may assign infeasible allocations. We require that tax schedules must balance the government budget for every possible vector of revelations. When individuals reveal their type by simple announcements, all undistorted allocations can be still implemented, even with off-equilibrium feasibility constraints.     

Environmental Tax in a Green Market

We examine the impact of an emission tax in a green market characterized by consumers’ environmental awareness and competition between firms for both environmental quality and product prices. The unique aspect of this model comes from the assumption that the cost for an increase in quality is fixed. We show that the emission tax improves welfare, thanks to a decline in pollution and despite an accentuation of product differentiation. The higher the marginal environmental damage is, the higher the optimal tax will be. The optimal tax, however, becomes lower than the marginal damage when the market is not too large. Finally, when marginal environmental damage is not too low, the optimal tax leads to a green product monopoly.     

The impact of external R&D financing on innovation process from a supply-demand perspective

This paper sheds light on the effects of two different types of R&D financing sources respectively from a supply-demand combined perspective, namely subsidy from government and venture capital in market, on the innovation process. Our empirical analysis is based on a unique data set of industrial enterprises located in Beijing ZhongGuanCun Science Park during the period 2008–2015. In terms of the two stages of the innovation process, this paper untangles and compares the effects of the two financing sources on R&D input, patent output as well as profit outcome. We find that both supply- and demand-side external R&D financing channels have differential effects on the innovation process in terms of input, output or outcome as well as the different-sized enterprises. Supply-side subsidy tends to be more effective at the front end of the innovation process, while venture capital shows a demand-side consideration on technology evolution by focusing more on the back end of the innovation process. Both government subsidy and venture capital can have a significantly positive impact on the entire innovation process of small and micro enterprises, whereas for large and medium-sized enterprises, subsidy has no significant impact on profit outcome and venture capital can only affect patents positively. These findings suggest that the Chinese government should focus more on small and micro firms and increase such firms’ access to venture capital through a process of certification, so as to achieve an effective combination of government functions and market functions.     

The Financing of Regulatory Agencies

This paper examines the financing of monitoring agencies deriving the welfare-improving combinations of public revenue, industry fees, and penalties that should be used to finance quality regulations. The model shows that if some firms are not expected to comply with quality standards, penalties are optimal to cover the agencys regulatory exposure though these need to be augmented with other instruments as monitoring costs increase. If all firms are expected to comply with the quality standards, a per-firm fee is the optimal method of regulatory financing but needs to be augmented with a lump-sum tax as monitoring costs increase.Jel classification: H21, L51The authors extend their thanks to Editor Michael Crew and two anonymous reviewers for helpful comments and suggestions. All errors are ours.     

Coming out of the shadows? Estimating the impact of bureaucracy simplification and tax cut on formality in Brazilian microenterprises

This paper evaluates the impact of a program of bureaucracy simplification and tax reduction on formality among Brazilian microenterprises — the SIMPLES program. We document an increase of 13 percentage points in formal licensing among retail firms created after the program when compared to firms in ineligible sectors. The impact on retailers is robust to a series of tests. We find no impact on construction, transportation, services and manufacturing sectors.     

Timing and Commitment of Environmental Policy,Adoption of New Technology,and Repercussions on R&;D

We investigate the interplay between environmental policy, incentives to adoptnew technology, and repercussions on R&D. We study a model where a monopolistic upstream firm engages in R&D and sells advanced abatement technology to polluting downstream firms. We consider four different timing and commitment regimes of environmental tax and permit policies: ex post taxation (or issuing permits), interim commitment to a tax rate (a quota of permits) after observing R&D success but before adoption, and finally two types of ex antecommitment before R&D activity, one with a unique tax rate (quota of permits), the other one with a menu of tax rates (permit quotas). We study the second best tax and permit policies and rank these with respect to welfare. In particular, we find that commitment to a menu of tax rate dominates all other policy regimes.