The Cost of the Intersectoral and Intertemporal Price Distortions of a Corporation Income Tax

Abstract

Listen

Translate article

By raising corporations' cost of capital above that for non-corporate firms, the corporation income tax induces an inefficient intersectoral allocation of capital.' Further, by forcing a wedge between the gross-of-tax return to savings in the corporate sector and the net return, the corporation income tax also causes an inefficient allocation of consumption over time. Harberger [12] and Shoven [18] have examined the intersectoral misallocation of capital induced by the corporation income tax.2 They both estimated the resulting efficiency loss at around five-tenths of a per cent of national income. Feldstein has recently treated the corporation income tax as a tax on all capital income (i.e., on the return to all savings) and has investigated the resulting distortion in the timing of consumption [8]. His rough estimates suggest that this distortion also induces an efficiency cost of around five-tenths of a per cent of national income. As Feldstein cautions, one cannot simply take his estimates and add them to the Harberger-Shoven estimates to get an over-all picture of the efficiency cost of the corporation income tax [8, S47 fn. 42]. Harberger and Shoven use a static model which cannot take into account distortions in future consumption. Feldstein, on the other hand, uses a one-sector