Lobbying for Capital Tax Benefits and Misallocation of Resources during a Credit Crunch
Corporations often have strong incentives to exert influence on the tax code and obtain additional tax benefits through lobbying. For the U.S. financial crisis of 2007-09, this paper shows that lobbying activity intensified, driven by large firms i...
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| Format: | Working Paper |
| Language: | English |
| Published: |
World Bank, Washington, DC
2018
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| Online Access: | http://documents.worldbank.org/curated/en/354941522689036064/Lobbying-for-capital-tax-benefits-and-misallocation-of-resources-during-a-credit-crunch http://hdl.handle.net/10986/29607 |
| Summary: | Corporations often have strong
incentives to exert influence on the tax code and obtain
additional tax benefits through lobbying. For the U.S.
financial crisis of 2007-09, this paper shows that lobbying
activity intensified, driven by large firms in sectors that
depend more on external finance. Using a heterogeneous agent
model with financial frictions and endogenous lobbying, the
paper studies the aggregate consequences of this rise in
lobbying activity. When calibrated to U.S. micro data, the
model generates an increase in lobbying that matches the
magnitude and the cross-sector and within-sector variation
observed in the data. The analysis finds that lobbying for
capital tax benefits, together with financial frictions,
accounts for 80 percent of the decline in output and almost
all the drop in total factor productivity observed during
the crisis for the non-financial corporate sector. Relative
to an economy without lobbying, this mechanism increases the
dispersion in the marginal product of capital and amplifies
the credit shock, leading to a one-third larger decline in
output. The paper also studies the long run effects of
lobbying. Restricting lobbying implies welfare gains of 0.3
percent after considering the transitional dynamics to the
new steady state. |
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