The Deadweight Loss from Taxing Small and Medium-Sized Enterprises

This paper computes the deadweight loss from taxing Small and Medium-Sized Enterprises with a Conventional Corporate Income Tax. I develop a stylized model that allows for both credit-constrained and unconstrained firms. Thereafter, I use micro-data from Corporate Income Tax Returns in the Netherlands to study the eect of the Corporate Income Tax rate structure on both investment decisions and debt-equity choices of Small and Medium-Sized Enterprises. Identification comes from changes in both tax rates and tax brackets in the period 2004 till 2009. Using the elasticities estimated, I find that the deadweight loss in a model with both credit-constrained and unconstrained firms is more than twice the deadweight loss computed in a model with only unconstrained firms.