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Corporate Taxation, Capital Formation, and the Substitution Elasticity between Labor and Capital

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Robert Chirinko ()

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Abstract

This study provides some perspective on analyzing the effects of corporate taxation on capital formation. Our framework translates tax policy legislation into real outcomes, and identifies three parameters that play a central role in determining the impact on policy. The remainder of the paper focuses on the substitution elasticity between labor and capital. Several of the prominent studies representing the major contours of this research area over the past 40 years are examined. Our review of five general equilibrium studies indicates that alternative values of this elasticity matter a great deal for the welfare changes following from proposed tax reforms. The paper concludes with two lessons for tax policy analysis and some suggestions for future research.

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Paper provided by CESifo GmbH in its series CESifo Working Paper Series with number CESifo Working Paper No. 707.

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Date of creation: 2002
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Handle: RePEc:ces:ceswps:_707

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Find related papers by JEL classification:
H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm

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  1. Rainer Klump & Peter McAdam & Alpo Willman, 2004. "Factor Substitution and Factor Augmenting Technical Progress in the US: A Normalized Supply-Side System Approach," DEGIT Conference Papers c009_030, DEGIT, Dynamics, Economic Growth, and International Trade. [Downloadable!]
    Other versions:
  2. Luca Bindelli, 2005. "Testing the New Keynesian Phillips curve: a frequency domain approach," Money Macro and Finance (MMF) Research Group Conference 2005 69, Money Macro and Finance Research Group. [Downloadable!]
  3. Robert S. Chirinko, 2008. "ó: The Long And Short Of It," CESifo Working Paper Series CESifo Working Paper No. , CESifo GmbH. [Downloadable!]
  4. Martin D. Dietz & Christian Keuschnigg, 2003. "Corporate Income Tax Reform in Switzerland," University of St. Gallen Department of Economics working paper series 2003 2003-07, Department of Economics, University of St. Gallen. [Downloadable!]
    Other versions:
  5. Aumara Bastos Feu Alvim de Souza, 2004. "Comportamento Da Produtividade Do Capital E Sua Influência Na Contabilidade Do Crescimento," Anais do XXXII Encontro Nacional de Economia [Proceedings of the 32th Brazilian Economics Meeting] 043, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics]. [Downloadable!]
  6. Ferran Sancho, 2004. "Una estimación del coste marginal en bienestar del sistema impositivo en España," Hacienda Pública Española, IEF, vol. 169(2), pages 117-132, June. [Downloadable!]
  7. R. Alison Felix, 2007. "The incidence of capital taxation and the magnitude of its burden," Regional Research Working Paper RRWP 07-02, Federal Reserve Bank of Kansas City. [Downloadable!]
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