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Taxation and private investment: evidence for Chile

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  • R. Vergara

Abstract

Along with several structural reforms, Chile embarked upon a major income tax reform in the eighties. Its basic feature was a significant reduction in the corporate income tax rate. The purpose of this article is to investigate empirically the link between the tax reform and the investment performance of Chile since the reform. Macroeconomic and microeconomic evidence is found to be consistent with the hypothesis of the reduction in the corporate income tax as being one of the determinants of the investment boom of the late eighties and nineties in Chile. Our estimations suggest that there are two channels in which taxes affect investment: on the one hand, higher taxes increase the cost of capital (cost of capital channel); and on the other, they reduce internal funds available for investment (liquidity constraint channel).

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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal Applied Economics.

Volume (Year): 42 (2010)
Issue (Month): 6 ()
Pages: 717-725

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Handle: RePEc:taf:applec:v:42:y:2010:i:6:p:717-725

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  1. Chang-Tai Hsieh & Jonathan A. Parker, 2006. "Taxes and Growth in a Financially Underdeveloped Country: Evidence from the Chilean Investment Boom," NBER Working Papers 12104, National Bureau of Economic Research, Inc.
  2. Serven, Luis & Solimano, Andres, 1992. "Private Investment and Macroeconomic Adjustment: A Survey," World Bank Research Observer, World Bank Group, vol. 7(1), pages 95-114, January.
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Cited by:
  1. Rodrigo Vergara, 2005. "Productividad en Chile: Determinantes y Desempeño," Documentos de Trabajo 296, Instituto de Economia. Pontificia Universidad Católica de Chile..
  2. W. Robert Reed, 2013. "A Note on the Practice of Lagging Variables to Avoid Simultaneity," Working Papers in Economics 13/32, University of Canterbury, Department of Economics and Finance.
  3. Shaun K. Roache, 2006. "Domestic Investment and the Cost of Capital in the Caribbean," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 6(3).
  4. Rodrigo Cerda & Felipe Larraín, 2005. "Inversión Privada e Impuestos Corporativos: Evidencia para Chile," Documentos de Trabajo 297, Instituto de Economia. Pontificia Universidad Católica de Chile..
  5. Ricardo N. Bebczuk & Eduardo A. Cavallo, 2014. "Is Business Saving Really None of Our Business?," IDB Publications 85654, Inter-American Development Bank.
  6. Bernardo Dominichetti H. & María Dolores Roeschmann G., 2006. "Inversión, Flujo de Caja y Colocaciones: Evidencia con Datos Agregados," Notas de Investigación Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 9(1), pages 79-83, April.
  7. Shaun K. Roache, 2006. "Domestic Investment and the Cost of Capital in the Caribbean," IMF Working Papers 06/152, International Monetary Fund.

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