The relationship between privatization and corporate taxation policies
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The relationship between privatization and corporate taxation policies Yi Liu1,2 • Toshihiro Matsumura3 • Chenhang Zeng4 Received: 31 December 2019 / Accepted: 27 August 2020 Ó Springer-Verlag GmbH Austria, part of Springer Nature 2020
Abstract We investigate how the corporate (profit) tax rate affects the optimal degree of privatization in a mixed duopoly with a minimal profit constraint for the private firm. We show that the profit tax rate directly affects the behavior of the partially privatized firm, and therefore affects the behavior of the private firm through strategic interactions. Regardless of whether the constraint is binding, the optimal degree of privatization increases with the corporate tax rate. The reason is that an increase of corporate tax rate reduces the profits flowing to foreign investors, which mitigates the welfare losses of privatization. Furthermore, the optimal degree of privatization decreases (increases) with the foreign ownership share in the private firm if the constraint is ineffective (effective). This result suggests that a minimal profit constraint can be crucial in the optimal privatization policy. Keywords Profit tax Minimal profit constraint Foreign ownership Optimal public ownership
Mathematics Subject Classification D43 H44 L33 & Chenhang Zeng [email protected] Yi Liu [email protected] Toshihiro Matsumura [email protected] 1
The College of Economics and Trade, Hunan University, Changsha 410079, Hunan, People’s Republic of China
2
Institute of Industrial Economics at Chinese Academy of Social Science, No. 1 East Wenxing Rd, Xicheng District, Beijing 100044, People’s Republic of China
3
Institute of Social Science, The University of Tokyo, 7-3-1, Hongo, Bunkyo-ku, Tokyo 113-0033, Japan
4
Wenlan School of Business, Zhongnan University of Economics and Law, 182 Nanhu Ave., Wuhan 430073, People’s Republic of China
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Y. Liu et al.
1 Introduction Privatization policy and corporate taxation policy are two important issues for governments. In many industries, we observe a considerable number of public enterprises coexisting with private enterprises (mixed oligopolies).1 In planned and transitional economies such as China, Vietnam, and Russia, the presence of the public enterprises is further significant, with many state enterprises competing against private enterprises (Cai and Li 2011; Huang and Yang 2016; Huang et al. 2017; Fridman 2018). The optimal privatization policies in these mixed oligopolies attract extensive attention.2 Corporate tax, one of the main taxes in many developed, developing, and transitional economies, changes firms’ behavior under imperfect competition, thus affecting the privatization policy of the government, particularly in the presence of foreign competition. To improve the current understanding of how privatization and corporate taxation policies are connected, this study investigates their relationship in a mixed duopoly with the consideration of foreign penetration. On markets whe
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