Differential Taxation of for-Profit and Nonprofit Firms: A Computational General Equilibrium Approach

Abstract

A small-scale computational general equilibrium model is used to examine the efficiency costs of exempting commercial nonprofits from the corporate income tax when they compete directly with for-profit firms. Simulation results from differential-incidence experiments indicate significant welfare gains when the tax wedge is reduced at the margin between the for-profit and nonprofit firms and the change in government revenue is financed by lump-sum taxes. However, although welfare gains exist at the margin, average excess burden estimates suggest that some level of differential taxation is welfare-improving if nonprofits contribute to the production of a good with positive externalities. Results are compared with those from the literature on the differential taxation of corporate and noncorporate firms and are found generally consistent.