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Optimal Corporation Tax: An I.O. Approach

Luca Colombo, Paola Labrecciosa and Patrick Paul Walsh

Our IO approach links optimal effective corporation tax rates to the nature of
sunk costs within industries. Theory predicts that optimal effective corporation tax rates will be negatively related to industry specific sunk cost, and hence industry concentration. Governments should tax industries with monopolistic power softly. Evidence suggests that this Schumpeterian (1942) principle of corporate taxation was used widely across industries in France, Italy and the UK in the 1990s.

Keywords: Effective Corporation Tax Rate, Sunk Costs, Industry Concentration.
JEL classifiers: H25 and L52.

Last updated 28 August 2014 by IIIS (Email).