Calculating the Corporate Laffer Tax Rate Using Micro-Data

Abstract

This paper uses administrative panel micro-data of Israeli firms between 2006 and 2015 to calculate Corporate Laffer Tax rate. During this period, the corporate tax rate was gradually reduced, and raised back at the end of the sample. We first propose a theoretical model where three effects interact: a mechanical effect, a dynamic effect - related to opening and closing firms - and an efficiency effect on profits. We run regressions for opening and closing firms, and for profits, as a function of the corporate tax rate, together with a bunch of additional explanatory variables. Using the coefficients obtained from these regressions we estimate the Laffer tax rate, which is in a range between 32.5 and 38 percent – figures that fall into the range shown in the literature by using macro data. Concerning branches, we found that food service is characterized by a low Laffer tax rate (14 percent) while manufacturing by a high one (39 percent).