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Leaving the global playing field through optimal non-discriminatory corporate taxes and subsidies

Author

Listed:
  • Antonella Nocco
  • Gianmarco I. P. Ottaviano
  • Matteo Salto
  • Atsushi Tadokoro
Abstract
Due to markup distortions, in international trade models with monopolistic competition and heterogeneous firms the market equilibrium is inefficient unless demand exhibits constant elasticity of substitution. When it does not, global welfare maximization generally requires policy intervention that is firm specific, and consequently of limited practical relevance due to its information requirements, discriminatory nature and susceptibility to rent seeking. We assess whether there are particular conditions under which countries can coordinate on the common use of policy tools that are not firm-specific but still maximize global welfare. We show that a demand system implying constant absolute pass-through from marginal cost to price is both necessary and sufficient for the existence of welfare-maximizing non-discriminatory policies that can level the global playing field with a one-size-fits-all approach for all firms selling in a given market, eventually complemented by a global tax rate on corporate profits.

Suggested Citation

  • Antonella Nocco & Gianmarco I. P. Ottaviano & Matteo Salto & Atsushi Tadokoro, 2024. "Leaving the global playing field through optimal non-discriminatory corporate taxes and subsidies," CEP Discussion Papers dp1992, Centre for Economic Performance, LSE.
    • Handle: RePEc:cep:cepdps:dp1992
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    References listed on IDEAS

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    6. Campolmi, Alessia & Fadinger, Harald & Forlati, Chiara, 2014. "Trade policy: Home market effect versus terms-of-trade externality," Journal of International Economics, Elsevier, vol. 93(1), pages 92-107.
    7. Janeba, Eckhard & Schjelderup, Guttorm, 2023. "The global minimum tax raises more revenues than you think, or much less," Journal of International Economics, Elsevier, vol. 145(C).
    8. Marc J. Melitz & Gianmarco I. P. Ottaviano, 2008. "Market Size, Trade, and Productivity (DOI:10.111/j.1467-937x.2007.00463.x)," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 75(3), pages 985-985.
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    Keywords

    international trade policy; firm heterogeneity; monopolistic competition; multilateralism level playing field;
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