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

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  • Chang-Tai Hsieh
  • Jonathan A. Parker

Abstract

The performance of the Chilean economy since the mid-1980s has been extraordinary: Chile’s per capita gross domestic product (GDP) grew at an average rate of 4.5 percent per year in the decade following 1983. While not as impressive as the growth miracles of the Asian developing economies in the postwar period, Chile’s strong economic performance is unique among the developing economies in the Western Hemisphere. An important compo- nent of Chile’s impressive growth was a saving and investment boom on the order of 10 percent of GDP. In this paper, we present evidence that a main cause of this investment and growth boom was a corporate tax reform that cut the tax rate on retained profits from nearly 50 percent to 10 percent over the period 1984–86.

Suggested Citation

  • Chang-Tai Hsieh & Jonathan A. Parker, 2007. "Taxes and Growth in a Financially Underdeveloped Country: Evidence from the Chilean Investment Boom," Economía Journal, The Latin American and Caribbean Economic Association - LACEA, vol. 0(Fall 2007), pages 1-53.
    • Handle: RePEc:col:000425:014202
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    JEL classification:

    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • O54 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Latin America; Caribbean
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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