Profit taxation and the optimal privatisation of state holding corporations

Abstract

To examine the optimal privatisation of a state holding corporation when the government imposes a corporate profit tax on firms, we consider a multiplant state holding corporation producing differentiated goods, competing with firms in the private sector that may be uniplant or multiplant. This set up applies to many mixed markets. We find that the optimal privatisation depends on not only the degree of product substitution and the production organisation of firms in the private sector, but also on the profit tax imposed on firms. Specifically, the optimal privatisation degree increases with the profit tax imposed on firms. There is more privatisation when state holding corporations are sold to different investors than when they are sold to a single investor, and when firms in the private sector are multiplant than when they are uniplant. Given the degree of privatisation, the private sector reduces more of its production when responding to a higher profit tax rate. Moreover, the hypothesis of profit tax neutrality holds under the optimal degree of privatisation. The result suggests that the effect of the profit tax in mixed markets can be cushioned by privatisation.

Corporate profit tax, firm entry with unemployment, and income inequality

“…Proposition 1 further confirms the neutrality of corporate profit tax under a given number of manufacturing firms, which is the same with the findings in Panteghini (2001), Kuo et al. (2021), Dong and Wang (2021), and so on.…”

“…Corporate tax neutrality is robust in mixed oligopoly, see . Dong and Wang (2021) in mixed oligopoly model demonstrated that the optimal privatization depends on not only the degree of product substitution and the production organization of firms in the private sector, but also on the profit tax imposed on firms.…”

“…Setting minimum wage, for unskilled labor, is commonly observed in Chinese cities, and considering that unskilled labor migrating into industrial sector causes unemployment, unskilled labor, in industrial sector, has to accept the minimum wage. In the informal sector, unskilled labor wage is not regulated by the minimum wage.6 FollowingPanteghini (2001),, andDong and Wang (2021), we assume that corporate profit tax is levied on operative profit. The reasoning is that if corporate profit tax is levied on net profit, a change in corporate taxation rate will not affects firm's production in the short and long run, which is inconsistent with the reality.…”

Does CSR influence privatization wave?

“…Researchers have refocused attention on state holding corporations in mixed markets, and to this end, Bárcena‐Ruiz and Garzón (2017) analyzed whether or not to privatize state‐owned corporations that may produce differentiated goods; Dong et al (2018) studied the optimal privatization of a state holding corporation; Bárcena‐Ruiz and Garzón (2020) considered mergers between local public firms; while in another paper, Bárcena‐Ruiz et al (2020) examined the presence of foreign‐owned firms and partial privatization of state holding corporations. Besides, Dong and Wang (2019, 2021 respectively) studied the optimal privatization of such state holding corporations when private firms might hold corporate social responsibility and the effects of profit taxation.…”

Tariff simplification, privatization, and welfare superiority

“…3 More recent papers in mixed oligopoly: Lee et al (2013), Choi (in press), Dong and Wang (2021), and Zhang and Wang (2022). 4 Fjell and Pal (1996) first introduced foreign private firms to mixed oligopoly models.…”