Alaïs Martin-Baillon, Sciences Po - (Job Market Seminar)

"When should we tax firms? Optimal corporate taxation with firm heterogeneity"

Abstract

Corporate fiscal policy over the business cycle is carried out in very different ways over time and across countries. Moreover, little is known about how it should be conducted. This paper studies the design of optimal fiscal policy in a heteroge- neous firm environment, when the economy is hit by aggregate shocks. It provides tools to understand when and how heterogeneous firms should be taxed or subsi- dized over cycles. To tackle this issue, I first solve a tractable model which delivers a simple distribution of firms. In this framework, I provide an analytical character- ization of the corporate tax rate over the business cycle. Then, using a fully fledged heterogeneous firm model and cutting-edge computational method, I solve for the optimal path of the tax rate in this environment. My main result is that, in both exercises, the variation of the optimal tax rate depends on the expected persistence of the aggregate shock. This is due to the presence of financial constraints that prevent the allocation of capital from being optimal. I show that the magnitude of this problem varies over the business cycle depending on the persistence of the aggregate shock. When the shock is very persistent, this problem decreases and the optimal tax rate is pro-cyclical. On the contrary, when the shock is not persistent, this problem increases and the optimal tax rate is counter-cyclical.

Contact person: Søren Leth-Petersen