Corporate Tax Asymmetry and Market Power

• In Event: Efficiency and Distortions in the Corporate Tax

Abstract

This paper examines the interaction of the asymmetry of the corporate tax system and firm market power. Since losses are not immediately refunded, firms may face different effective marginal tax rates depending on their profitability. In particular, firms that are already in highly profitable positions are further advantaged through this asymmetry. To demonstrate this feature, I develop a simple dynamic model featuring firms of varying markups making quantity and investment decisions. In the model, lower markup firms experience a higher marginal tax rate and a larger investment decision distortion relative to high markup firms. I then use firm financial data from Compustat to empirically explore the relationship between measures of market power and tax loss.

Author

• Peter Choi, peterjc@umich.edu