Abstract
We use a dynamic model of the firm to study the determinants of the Laffer tax rate (i.e., the corporate income tax rate that maximizes tax proceeds). Under a standard parameterization of the model, we find that the curvature of the production function, the market cost of capital, and the operating costs are among the main determinants of that revenue-maximizing rate. We also find that the Laffer tax rate is around 68% for a representative firm and it varies across U.S. industries in the range 64%–74%. Finally, our results show that the revenue-maximizing rate behaves procyclically over the business cycle.
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