Corporate taxes with unobservable profits

  1. Antelo, Manel 1
  1. 1 Universidade de Santiago de Compostela
    info

    Universidade de Santiago de Compostela

    Santiago de Compostela, España

    ROR https://ror.org/030eybx10

Revista:
Cuadernos de economía: Spanish Journal of Economics and Finance

ISSN: 2340-6704,  0210-0266

Año de publicación: 2016

Volumen: 39

Número: 110

Páginas: 76-86

Tipo: Artículo

DOI: 10.1016/J.CESJEF.2016.05.002 DIALNET GOOGLE SCHOLAR lock_openBiblos-e Archivo editor

Otras publicaciones en: Cuadernos de economía: Spanish Journal of Economics and Finance

Resumen

Using a two-period tax-signalling model, a study is performed on the behaviour of a revenue-raising government in setting profit-based corporate taxes for a company with private information on its potential profitability. In a separating equilibrium in which both the high- and low-profit company produce a positive amount in period 1 (separating equilibrium S2), the tax set for that period is lower than that of the symmetric information, resulting in informational rent to the high-profit company in that period, but not in period 2. As result, taxes increase with time. In a separating equilibrium in which only the high-profit company produces (separating equilibrium S1 or shut-down equilibrium), no informational rent goes to the high-profit company in either period, but at the cost that the low-profit firm exits the market. Finally, in a pooling equilibrium, taxes are time-invariant and charged in such a way that period-1 informational rent to the high-profit company is lower than in S2, but persists in period 2. Consequently, the government can maximize tax revenue by not forcing information disclosure. The impact of government behaviour on welfare is also examined

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acknowledgement is also to the Xunta de Galicia for funding through project GPC 2013-045

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