A Sufficient Statistics Approach to Optimal Corporate Taxes

• In Event: Efficiency and Distortions in the Corporate Tax

Abstract

This paper proposes a simple framework to characterize the optimal corporate tax as a function of sufficient statistics using a stylized general equilibrium model with endogenous investment and labor supply. The analysis provides a closed-form solution for the optimal corporate tax that is solely a function of estimable objects. The elasticity of taxable profits with respect to the net-of-corporate tax rate is revealed to be a sufficient statistic for the efficiency costs of corporate taxation. This efficiency cost is weighted against two distributional considerations. First, the optimal corporate tax depends negatively on the welfare weight of capitalists. Second, wage incidence elasticities represent a net transfer from capitalists to workers and, therefore, affect the optimal corporate tax in proportion to their relative welfare weights. We consider several extensions to the baseline model -- evasion, international capital mobility, labor market power, interactions with labor income taxes, and organizational form choice -- and find that the main result is remarkably robust, meaning that the roles of taxable profits elasticities, welfare weights, and wage incidence elasticities remain key in determining the optimal corporate tax. However, In some extensions, the formula is augmented by new elasticities that account for additional fiscal externalities. We calibrate our optimal formulas by combining a meta-analysis of the existing empirical literature on the effects of corporate taxes and an original analysis using the Survey of Consumer Finances (SCF).

Coauthor: Dustin Swonder.

Author

• Damian Vergara, damiv@umich.edu