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Taxation and private investment: evidence for Chile

  • R. Vergara

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).

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File URL: http://www.tandfonline.com/doi/abs/10.1080/00036840701720747
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Article provided by Taylor & Francis Journals in its journal Applied Economics.

Volume (Year): 42 (2010)
Issue (Month): 6 ()
Pages: 717-725

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Handle: RePEc:taf:applec:v:42:y:2010:i:6:p:717-725
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  1. Chang-Tai Hsieh & Jonathan A. Parker, 2006. "Taxes and Growth in a Financially Underdeveloped Country: Evidence from the Chilean Investment Boom," NBER Working Papers 12104, National Bureau of Economic Research, Inc.
  2. 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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