DIW Applied Micro Seminar

Simon Naitram, University of the West Indies, Cave Hill

Optimal Benefit-Based Corporate Income Tax

Abstract:   I derive an optimal benefit-based corporate tax rate formula as a function of the public input elasticity of profits and the (net of) tax elasticity of profits. I argue that the existence of the corporate income tax should be justified by the benefit-based view of taxation: firms should pay tax according to the benefits they receive from the use of the public input. I argue that benefit-based corporate taxation is normatively fair. Since the public input is a location-specific factor, a positive benefit-based corporate tax rate is also feasible even in a small open economy. The benefit-based view gives three clear principles of corporate tax design. First, we should tax corporate profits at source. Second, the optimal tax base is location-specific rents. Third, profit shifting is normatively wrong. An empirical application of the formula suggests the optimal benefit-based corporate tax rate on public corporations in the United States lies in the range of 35 to 59 percent.

Speakers
Simon Naitram, University of the West Indies, Cave Hill
Contacts
  • Sibylle Kremser
    skremser@diw.de
    +49 30 89789 673
  • Peter Haan
    phaan@diw.de
    +49 30 89789 165