Abstract: Corporation tax systems around the world treat gains and losses asymmetrically. This paper examines the impact of changing the refundability of tax losses in a cash flow tax system. A dynamic game of complete information is used to analyse refund policies in an imperfectly competitive setting. In this supergame, firms produce a homogeneous good and sustain tacit collusion by using credible and severe punishments of deviations. The analysis of the most collusive equilibrium with losses indicates that a tax policy which increases refundability has the following impacts: it reduces collusive industry output, increases market price, and therefore enhances tacit collusion. This policy also reduces social welfare even though refunds are never given in equilibrium.
JEL Classification: C72;H25