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Taxation and the life cycle of firms

Author

Listed:
  • Andrés Erosa

    (Universidad Carlos III de Madrid)

  • Beatriz González

    (Banco de España and Universidad Carlos III de Madrid)

Abstract

The Hopenhayn and Rogerson (1993) framework is extended to understand how different forms of taxing capital income affect firms’ investment and financial policies over their life cycle. Corporate income taxation slows down firm growth over the life cycle by reducing after-tax profits available for reinvesting, and it distorts optimal firms’ size. Dividend income taxation reduces external equity financing, but it does not affect size at maturity. Capital gains taxes make firms start larger, so that internal growth is lower. With these mechanisms in mind, we calibrate our economy to the US and discuss different revenue-neutral tax reforms that might lead to increases in aggregate output and capital.

Suggested Citation

  • Andrés Erosa & Beatriz González, 2019. "Taxation and the life cycle of firms," Working Papers 1943, Banco de España.
    • Handle: RePEc:bde:wpaper:1943
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Nezih Guner & Javier López-Segovia & Roberto Ramos, 2020. "Reforming the individual income tax in Spain," SERIEs: Journal of the Spanish Economic Association, Springer;Spanish Economic Association, vol. 11(4), pages 369-406, December.
    2. Juan Carlos Conesa & Begoña Domínguez, 2019. "The timing of optimal capital income tax reforms: the role of intangible capital investment," SERIEs: Journal of the Spanish Economic Association, Springer;Spanish Economic Association, vol. 10(3), pages 419-438, November.
    3. Thomas J. Sargent & John Stachurski, 2024. "Dynamic Programming: Finite States," Papers 2401.10473, arXiv.org.
    4. Matteo Ghilardi & Roy Zilberman, 2022. "Macroeconomic Effects of Dividend Taxation with Investment Credit Limits," IMF Working Papers 2022/127, International Monetary Fund.
    5. Pijoan-Mas, Josep & di Giovanni, Julian & García-Santana, Manuel & Moral-Benito, Enrique, 2022. "Government Procurement and Access to Credit: Firm Dynamics and Aggregate Implications," CEPR Discussion Papers 17023, C.E.P.R. Discussion Papers.
    6. Julian di Giovanni & Manuel García-Santana & Priit Jeenas & Enrique Moral-Benito & Josep Pijoan-Mas, 2022. "Buy Big or Buy Small? Procurement Policies, Firms' Financing, and the Macroeconomy," Staff Reports 1006, Federal Reserve Bank of New York.
    7. Dyrda, Sebastian, 2019. "Discussion of “Taxation and The Life Cycle of Firms” by Erosa and González," Journal of Monetary Economics, Elsevier, vol. 105(C), pages 131-134.
    8. Luisa Fuster, 2022. "Macroeconomic and distributive effects of increasing taxes in Spain," SERIEs: Journal of the Spanish Economic Association, Springer;Spanish Economic Association, vol. 13(4), pages 613-648, December.
    9. Lesia Tkachyk & Mariya Rubakha & Nataliia Ilkiv, 2020. "Optimization of Corporate Profit Taxation in the Context of Stimulating Their Investment Activity: The Case of Ukraine," Economic Studies journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 4, pages 28-51.

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    More about this item

    Keywords

    macroeconomics; capital income taxation; firm dynamics; investment;
    All these keywords.

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm

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