“Tax Wedges, Financial Frictions, and Misallocation” Research Seminar organised by the Institute of Economics

At the lunchtime research seminar, he introduced us to his recent research project about how different legal forms of American firms might influence the company’s tax burden. Therefore, a so-called tax wedge appears. In a nutshell, he and his co-authors developed a model which showed how the tax wedge depends on – amongst others – financial frictions, the size of the firms, and, eventually, leads to an endogenous choice of the legal form. An increase in the tax wedge increases the tax burden of the workers partly by general equilibrium effects. More specifically, the higher the tax wedge, the fewer owners will choose the more efficient legal form, which, in turn, leads to lower employment and a significant misallocation of resources. The approach mainly relies on the static description of occupational choice, organisation form choice, and investment choice; however, plans introduce explicit dynamics.