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Taxation and private investment: evidence for Chile

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  • R. Vergara

Abstract

Along with several structural reforms, Chile embarked upon a major income tax reform in the eighties. Its basic feature was a significant reduction in the corporate income tax rate. The purpose of this article is to investigate empirically the link between the tax reform and the investment performance of Chile since the reform. Macroeconomic and microeconomic evidence is found to be consistent with the hypothesis of the reduction in the corporate income tax as being one of the determinants of the investment boom of the late eighties and nineties in Chile. Our estimations suggest that there are two channels in which taxes affect investment: on the one hand, higher taxes increase the cost of capital (cost of capital channel); and on the other, they reduce internal funds available for investment (liquidity constraint channel).

Suggested Citation

  • R. Vergara, 2010. "Taxation and private investment: evidence for Chile," Applied Economics, Taylor & Francis Journals, vol. 42(6), pages 717-725.
  • Handle: RePEc:taf:applec:v:42:y:2010:i:6:p:717-725
    DOI: 10.1080/00036840701720747
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    References listed on IDEAS

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    1. Chang-Tai Hsieh & Jonathan A. Parker, 2007. "Taxes and Growth in a Financially Underdeveloped Country: Evidence from the Chilean Investment Boom," ECONOMIA JOURNAL, THE LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION - LACEA, vol. 0(Fall 2007), pages 1-53, August.
    2. Cummins, Jason G. & Hassett, Kevin A. & Hubbard, R. Glenn, 1996. "Tax reforms and investment: A cross-country comparison," Journal of Public Economics, Elsevier, vol. 62(1-2), pages 237-273, October.
    3. Alan J. Auerbach & Kevin Hassett & Jan Sodersten, 1995. "Taxation and Corporate Investment: The Impact of the 1991 Swedish Tax Reform," NBER Working Papers 5189, National Bureau of Economic Research, Inc.
    4. repec:esr:chaptr:jacb200114 is not listed on IDEAS
    5. Honohan, Patrick, 2001. "European and International Constraints on Irish Fiscal Policy," Papers BP2002/2, Economic and Social Research Institute (ESRI).
    6. Serven, Luis & Solimano, Andres, 1992. "Private Investment and Macroeconomic Adjustment: A Survey," World Bank Research Observer, World Bank Group, vol. 7(1), pages 95-114, January.
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    Cited by:

    1. repec:chb:bcchec:v:20:y:2017:i:1:p:050-071 is not listed on IDEAS
    2. Rodrigo Cerda & Felipe Larraín, 2005. "Inversión Privada e Impuestos Corporativos: Evidencia para Chile," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 42(126), pages 257-281.
    3. Shaun K. Roache, 2006. "Domestic Investment and the Cost of Capital in the Caribbean," IMF Working Papers 06/152, International Monetary Fund.
    4. Bernardo Dominichetti H. & María Dolores Roeschmann G., 2006. "Inversión, Flujo de Caja y Colocaciones: Evidencia con Datos Agregados," Notas de Investigación Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 9(1), pages 79-83, April.
    5. Ricardo Bebczuk & Eduardo Cavallo, 2016. "Is business saving really none of our business?," Applied Economics, Taylor & Francis Journals, vol. 48(24), pages 2266-2284, May.
    6. Rodrigo Cerda & J. Rodrigo Fuentes & Gonzalo García & José Ignacio Llodrá, 2015. "Understanding Domestic Savings in Chile," IDB Publications (Working Papers) 7254, Inter-American Development Bank.
    7. Rodrigo Vergara, 2005. "Productividad en Chile: Determinantes y Desempeño," Documentos de Trabajo 296, Instituto de Economia. Pontificia Universidad Católica de Chile..
    8. repec:clp:wpaper:wp31 is not listed on IDEAS
    9. repec:clp:wpaper:wp1 is not listed on IDEAS
    10. International Monetary Fund, 2005. "Chile; Selected Issues," IMF Staff Country Reports 05/316, International Monetary Fund.
    11. Ricardo N. Bebczuk & Eduardo A. Cavallo, 2014. "Is Business Saving Really None of Our Business?," IDB Publications (Working Papers) 6554, Inter-American Development Bank.
    12. repec:clp:wpaper:wp18 is not listed on IDEAS
    13. W. Robert Reed, 2013. "A Note on the Practice of Lagging Variables to Avoid Simultaneity," Working Papers in Economics 13/32, University of Canterbury, Department of Economics and Finance.
    14. Rodrigo Cerda & J. Rodrigo Fuentes & Gonzalo García & José Ignacio Llodrá, 2015. "Understanding Domestic Savings in Chile," IDB Publications (Working Papers) 91437, Inter-American Development Bank.
    15. Shaun K. Roache, 2006. "Domestic Investment and the Cost of Capital in the Caribbean," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 6(3).

    More about this item

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • 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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