Equity Prices, Market Power, and Optimal Corporate Tax Policy / Ignacio González, Juan A. Montecino, Joseph E. Stiglitz.

Format:

Book

Author/Creator:

González, Ignacio.

Contributor:

Montecino, Juan A.

Stiglitz, Joseph E.

National Bureau of Economic Research.

Series:

Working Paper Series (National Bureau of Economic Research) no. w33544.

NBER working paper series no. w33544

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2025.

Summary:

We study the optimal design of corporate tax policy in a textbook life-cycle model featuring two key deviations: (i) firms are imperfectly competitive and (ii) households save by purchasing equity shares in a stock market. In this simple environment, the financial wealth of savers is equal to the sum of the productive capital owned by firms and a component capturing the NPV of unproductive rents - what we term "market power wealth" (MPW). We show that this novel component has non-trivial macroeconomic effects, with important implications for optimal corporate tax policy. In particular, MPW significantly crowds out productive investment and accordingly can rationalize a high corporate tax rate. The optimal corporate tax code in our setting assigns the statutory corporate tax rate to target the financial value of pure profits while incentivizing capital accumulation with a partial expensing of firm investment costs.

Notes:

March 2025.

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