IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this article

Taxes and Growth in a Financially Underdevelopped Country: Evidence from the Chilean Investment Boom

  • Chang-Tai Hsieh

    ()

  • Jonathan A. Parker

    ()

This paper argues that taxation of retained profits is particularly distortionary in an economy with good growth prospects and poorly developed financial markets because it primarily reduces the investment of financially constrained firms, investment that has marginal product greater than the after-tax market real interest rate. Contrarily, taxes on distributed profits or capital gains primarily reduce the investment of financially unconstrained firms. Chile experienced a banking crisis over the period from 1982 to 1986 and in 1984 reduced its tax rate on retained profits from 50 percent to 10 percent. We show that, consistent with our theory, there was a large increase in aggregate investment after the reform which was entirely funded by an increase in retained profits. Further, we show that investment grew by more in industries that depend more on external financing, according to the Rajan and Zingales (1998) measure. Finally, we present some weak evidence from comparisons of investment rates across firms for several different measures of their likelihood of being financially constrained.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.brookings.edu/press/Journals/2007/economiafall2007.aspx
Download Restriction: no

Article provided by ECONOMIA JOURNAL OF THE LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION in its journal ECONOMIA JOURNAL OF THE LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION.

Volume (Year): (2007)
Issue (Month): (August)
Pages:

as
in new window

Handle: RePEc:col:000425:008638
Contact details of provider:

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. repec:idb:wpaper:322 is not listed on IDEAS
  2. Gruber, Jonathan, 1997. "The Incidence of Payroll Taxation: Evidence from Chile," Journal of Labor Economics, University of Chicago Press, vol. 15(3), pages S72-101, July.
  3. Ben S. Bernanke & Mark Gertler, 1995. "Inside the Black Box: The Credit Channel of Monetary Policy Transmission," NBER Working Papers 5146, National Bureau of Economic Research, Inc.
  4. Sebastian Edwards & Alejandra Cox Edwards, 2000. "Economic reforms and labour markets: policy issues and lessons from Chile," Economic Policy, CEPR;CES;MSH, vol. 15(30), pages 181-230, 04.
  5. Gilchrist, S. & Himmelberg, C.P., 1995. "Evidence on the Role of Cash Flow for Investment," Papers 95-29, Columbia - Graduate School of Business.
  6. Manuel R. Agosin & Gustavo Crespi & Leonardo Letelier, 1997. "Análisis sobre el aumento del ahorro en Chile," Research Department Publications 3008, Inter-American Development Bank, Research Department.
  7. Peter Diamond, 1993. "Privatization of Social Security: Lessons from Chile," NBER Working Papers 4510, National Bureau of Economic Research, Inc.
  8. R. Glenn Hubbard, 1997. "Capital-Market Imperfections and Investment," NBER Working Papers 5996, National Bureau of Economic Research, Inc.
  9. Agosin, Manuel R, 2001. "What Accounts for the Chilean Saving 'Miracle'?," Cambridge Journal of Economics, Oxford University Press, vol. 25(4), pages 503-16, July.
  10. Ricardo J. Caballero, 2000. "Structural Volatility in Chile: A Policy Report," IDB Publications (Working Papers) 6469, Inter-American Development Bank.
  11. Francisco A. Gallego & Norman Loayza, 2000. "Financial Structure in Chile: Macroeconomic Developments and Microeconomic Effects," Econometric Society World Congress 2000 Contributed Papers 1115, Econometric Society.
  12. Ben Bernanke & Mark Gertler & Simon Gilchrist, 1998. "The Financial Accelerator in a Quantitative Business Cycle Framework," NBER Working Papers 6455, National Bureau of Economic Research, Inc.
  13. Raghuram G. Rajan & Luigi Zingales, 1996. "Financial Dependence and Growth," NBER Working Papers 5758, National Bureau of Economic Research, Inc.
  14. Sebastian Edwards, 1998. "The Chilean Pension Reform: A Pioneering Program," NBER Chapters, in: Privatizing Social Security, pages 33-62 National Bureau of Economic Research, Inc.
  15. Felipe G. Morandé, 1996. "Savings in Chile: What Went Right?," Research Department Publications 4030, Inter-American Development Bank, Research Department.
  16. Felipe Morandé, 1996. "Savings in Chile: What Went Right?," IDB Publications (Working Papers) 5922, Inter-American Development Bank.
  17. Andrew A. Samwick, 2000. "Is Pension Reform Conducive to Higher Saving?," The Review of Economics and Statistics, MIT Press, vol. 82(2), pages 264-272, May.
  18. Bradford, David F., 1981. "The incidence and allocation effects of a tax on corporate distributions," Journal of Public Economics, Elsevier, vol. 15(1), pages 1-22, February.
  19. Jason G. Cummins & Kevin A. Hassett & R. Glenn Hubbard, 1995. "Tax Reforms and Investment: A Cross-Country Comparison," NBER Working Papers 5232, National Bureau of Economic Research, Inc.
  20. Hassett, Kevin A. & Hubbard, R. Glenn, 2002. "Tax policy and business investment," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 3, chapter 20, pages 1293-1343 Elsevier.
  21. Nina Pavcnik, 2000. "Trade Liberalization, Exit, and Productivity Improvements: Evidence from Chilean Plants," NBER Working Papers 7852, National Bureau of Economic Research, Inc.
  22. Cristián Larroulet Vignau, 1987. "Endeudamiento interno: orígenes, soluciones y perspectivas," Past Working Papers 27, Universidad del Desarrollo, School of Business and Economics.
  23. Kasahara, Hiroyuki, 2009. "Temporary Increases in Tariffs and Investment: The Chilean Experience," Journal of Business & Economic Statistics, American Statistical Association, vol. 27, pages 113-127.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:col:000425:008638. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Roberto Bernal)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.