“Misallocation and Productivity under Income Taxation” by Yi-Chan Tsai
National Taiwan University
University of Tokyo
This paper studies the effects of resource misallocation due to progressive tax and entry and exit regulation. We focus on a one-sector model where the production is carried out by heterogeneous firms with different productivity that are subject to progressive taxes. Under progressive tax system, a less productive firm faces a lower tax rate and a more productive firm faces a higher tax rate, which leads to the allocation of resource from a more productive firm to a less productive firm. As low-productivity firms uses inefficiently high level of resources with the low tax rates, progressive tax reduces overall production and aggregate productivity as other firm level distortions proposed in the literature. The quantitative results are nevertheless sensitive to the introduction of endogenous entry and exit.