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Corporate Firm Taxation, Firms Destruction and Long Run Capital Stock

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  • Rodrigo A. Cerda

Abstract

We study the impact of corporate firm taxation over long run capital accumulation and firms dynamics in an heterogeneous firms environment. We assume there are firms with different levels of productivity choosing investment on physical capital and facing an exogenous corporate tax rate. By means of numerical methods, we show that the tax system has a large impact on national investment rate and significantly affect the stock of capital of long term of the economy. The are two forces producing the result. Firstly, the corporate tax rate produces the usual distortion on the user cost of capital, as in Jorgenson (1963), and secondly, the existence of the corporate tax rate might even produce firm’s destruction, as it reduces after tax profits and thus firms become not profitable. This second channel is an extensive margin effect which may have a larger impact on aggregate investment rate and long run capital stock, than the usual distortion on the user cost of capital stressed on the literature.

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Paper provided by Econometric Society in its series Econometric Society 2004 Latin American Meetings with number 275.

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Date of creation: 11 Aug 2004
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Handle: RePEc:ecm:latm04:275

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Keywords: Corporate Firm taxation; Firms Destruction;

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  1. V.V. Chari & Lawrence J. Christiano & Patrick J. Kehoe, 1993. "Optimal fiscal policy in a business cycle model," Staff Report 160, Federal Reserve Bank of Minneapolis.
  2. Judd, Kenneth L., 1985. "Redistributive taxation in a simple perfect foresight model," Journal of Public Economics, Elsevier, vol. 28(1), pages 59-83, October.
  3. Jones, Larry E. & Manuelli, Rodolfo E. & Rossi, Peter E., 1997. "On the Optimal Taxation of Capital Income," Journal of Economic Theory, Elsevier, vol. 73(1), pages 93-117, March.
  4. Jovanovic, Boyan, 1982. "Selection and the Evolution of Industry," Econometrica, Econometric Society, vol. 50(3), pages 649-70, May.
  5. Chamley, Christophe, 1986. "Optimal Taxation of Capital Income in General Equilibrium with Infinite Lives," Econometrica, Econometric Society, vol. 54(3), pages 607-22, May.
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