A Sufficient Statistics Approach to Optimal Corporate Taxes

This paper characterizes the equity–efficiency tradeoff of corporate taxation using a stylized model that draws on the corporate investment and tax incidence literatures. We derive benchmark optimal corporate tax formulas in terms of estimable reduced-form elasticities and welfare weights on workers and firm owners. The elasticity of taxable profits is a sufficient statistic for the efficiency costs of the corporate tax. Higher corporate tax rates are desirable when firm owners have low welfare weights, and less desirable when taxing profits reduces wages. These empirical objects remain central across model extensions, including worker- and firm-level heterogeneity, endogenous occupations, shared firm ownership, tax sheltering, international capital mobility, productivity externalities, monopsony, and linear labor income taxes. We survey the empirical literature and find that existing estimates can support a wide range of optimal tax rates. A quantitative analysis identifies combinations of welfare weights that rationalize the current US 21% corporate tax rate as optimal and provides alternative numerical benchmarks for optimal corporate tax rates.