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February 28, 2020

DIW Applied Micro Seminar

Optimal Benefit-Based Corporate Income Tax


February 28, 2020
13:15 - 14:30


Anna J. Schwartz Room
Room 5.2.010
Mohrenstraße 58
10117 Berlin


Simon Naitram, University of the West Indies, Cave Hill


Johannes König/Carsten Schröder

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.


Simon Naitram, University of the West Indies, Cave Hill

Topics: Firms , Taxes