Profit taxation and the optimal privatisation of state holding corporations

Abstract

AbstractTo examine the optimal privatisation of a state holding corporation when the government imposes a corporate profit tax on firms, we consider a multiplant state holding corporation producing differentiated goods, competing with firms in the private sector that may be uniplant or multiplant. This set up applies to many mixed markets. We find that the optimal privatisation depends on not only the degree of product substitution and the production organisation of firms in the private sector, but also on the profit tax imposed on firms. Specifically, the optimal privatisation degree increases with the profit tax imposed on firms. There is more privatisation when state holding corporations are sold to different investors than when they are sold to a single investor, and when firms in the private sector are multiplant than when they are uniplant. Given the degree of privatisation, the private sector reduces more of its production when responding to a higher profit tax rate. Moreover, the hypothesis of profit tax neutrality holds under the optimal degree of privatisation. The result suggests that the effect of the profit tax in mixed markets can be cushioned by privatisation.