The Size Distribution of Firms , Cournot and Optimal Taxation

Tax laws and administrations often treat different sized firms differently. There is, however, little research on the consequences. As modeled here, oligopolists with different efficiencies determine the size distribution of firms. A government that maximizes a weighted sum of consumer surplus, profits and tax receipts can tax firms with different efficiencies differently and provides a reference point for other, more restricted differential tax systems. Taxes include a specific sales tax, an ad valorem tax and a profits tax with imperfect deductibility of capital cost, and a combination of the last two. In general there is a pattern of tax rates by efficiency of firm. It is heavily dependent on the social valuation of tax receipts. For instance, less efficient firms pay higher specific sales taxes if the social value of receipts is below 2 and lower taxes if the social value of receipts is above 2. Other analytic and simulation results are provided. When both ad valorem taxes and the imperfect profits tax are combined, simulations suggest that the former rate is higher and the latter rate is lower when the firm is less efficient.