Simulating corporate tax rate at Laffer curve's peak using microdata

Abstract

This paper uses administrative panel micro-data of Israeli firms between 2006 and 2015 to simulate corporate tax rates at Laffer Curve's peak. 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 related to profits. We run regressions for opening and closing firms, and for profits, as a function of the effective corporate tax rate, together with a bunch of additional explanatory variables. Using the coefficients obtained from these regressions we estimate the tax rate at the Laffer Curve's peak between 26 and 38 percent – which is within the range shown in the literature based on macro data. Concerning branches, we found that food services is characterized by a low tax rate at the peak of the Laffer Curve (14 percent) while manufacturing is characterized by a high one (39 percent).