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Economics of Industry Paper
Optimal Corporation Tax: An I.O. Approach
Luca Colombo, Paola Labrecciosa and Patrick Paul Walsh
February 2006
Paper No' EI 42:
Full Paper (pdf)

JEL Classification: H25; L52.

Tags: effective corporation tax rate; industry sunk costs; industry concentration.

Theory predicts that optimal effective corporation tax rates will be negatively related to industry specific sunk costs, and hence industry concentration. Governments should tax industries with monopolistic power softly. Evidence suggests that this Schumpeterian (1942) principle of corporate taxation was used widely across industries in France, Italy and the UK in the 1990s.