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Corporate Taxation, Capital Formation, and the Substitution Elasticity between Labor and Capital

  • Robert S. Chirinko

This study provides some perspective on analyzing the effects of corporate taxation on capital formation. Our framework translates tax policy legislation into real outcomes, and identifies three parameters that play a central role in determining the impact on policy. The remainder of the paper focuses on the substitution elasticity between labor and capital. Several of the prominent studies representing the major contours of this research area over the past 40 years are examined. Our review of five general equilibrium studies indicates that alternative values of this elasticity matter a great deal for the welfare changes following from proposed tax reforms. The paper concludes with two lessons for tax policy analysis and some suggestions for future research.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 707.

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Date of creation: 2002
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Handle: RePEc:ces:ceswps:_707
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  1. Nobuhiro Kiyotaki & Kenneth D. West, 1996. "Business Fixed Investment and the Recent Business Cycle in Japan," NBER Chapters, in: NBER Macroeconomics Annual 1996, Volume 11, pages 277-344 National Bureau of Economic Research, Inc.
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  3. Alan J. Auerbach, 1982. "Taxation, Corporate Financial Policy and the Cost of Capital," NBER Working Papers 1026, National Bureau of Economic Research, Inc.
  4. 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.
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  7. Ballard, Charles L. & Fullerton, Don & Shoven, John B. & Whalley, John, 2009. "A General Equilibrium Model for Tax Policy Evaluation," National Bureau of Economic Research Books, University of Chicago Press, edition 0, number 9780226036335.
  8. David Altig, 2001. "Simulating Fundamental Tax Reform in the United States," American Economic Review, American Economic Association, vol. 91(3), pages 574-595, June.
  9. Steven Fazzari & R. Glenn Hubbard & Bruce C. Petersen, 1987. "Financing Constraints and Corporate Investment," NBER Working Papers 2387, National Bureau of Economic Research, Inc.
  10. Sergio Rebelo, 1999. "Long Run Policy Analysis and Long Run Growth," Levine's Working Paper Archive 2114, David K. Levine.
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  12. Fox, Tyler & Fullerton, Don, 1991. "The irrelevance of detail in and computable general equilibrium model," Economics Letters, Elsevier, vol. 36(1), pages 67-70, May.
  13. Ben S. Bernanke & Mark Gertler, 1995. "Inside the Black Box: The Credit Channel of Monetary Policy Transmission," Journal of Economic Perspectives, American Economic Association, vol. 9(4), pages 27-48, Fall.
  14. Obstfeld, Maurice & Rogoff, Kenneth, 2000. "The Six Major Puzzles in International Macroeconomics: Is There a Common Cause?," Center for International and Development Economics Research, Working Paper Series qt0sx02651, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley.
  15. N. Gregory Mankiw & David Romer & David N. Weil, 1992. "A Contribution to the Empirics of Economic Growth," The Quarterly Journal of Economics, Oxford University Press, vol. 107(2), pages 407-437.
  16. Rosanne Altshuler & Alan J. Auerbach, 1987. "The Significance of Tax Law Asymmetries: An Empirical Investigation," NBER Working Papers 2279, National Bureau of Economic Research, Inc.
  17. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
  18. Harris, Milton & Raviv, Artur, 1991. " The Theory of Capital Structure," Journal of Finance, American Finance Association, vol. 46(1), pages 297-355, March.
  19. Cummins, Jason G. & Hassett, Kevin A., 1992. "The Effects of Taxation on Investment: New Evidence from Firm Level Panel Data," National Tax Journal, National Tax Association, vol. 45(3), pages 243-51, September.
  20. Engen, Eric M. & Gravelle, Jane G. & Smetters, Kent, 1997. "Dynamic Tax Models: Why They Do the Things They Do," National Tax Journal, National Tax Association, vol. 50(3), pages 657-82, September.
  21. Chirinko, Robert S. & Fazzari, Steven M. & Meyer, Andrew P., 1999. "How responsive is business capital formation to its user cost?: An exploration with micro data," Journal of Public Economics, Elsevier, vol. 74(1), pages 53-80, October.
  22. Bernheim, B. Douglas, 2002. "Taxation and saving," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 3, chapter 18, pages 1173-1249 Elsevier.
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  26. Caballero, Ricardo J, 1994. "Small Sample Bias and Adjustment Costs," The Review of Economics and Statistics, MIT Press, vol. 76(1), pages 52-58, February.
  27. Martin Feldstein, 1994. "Tax policy and international capital flows," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 130(4), pages 675-697, December.
  28. Austan Goolsbee, 1998. "Investment Tax Incentives, Prices, and the Supply of Capital Goods," The Quarterly Journal of Economics, Oxford University Press, vol. 113(1), pages 121-148.
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  30. Arnold C. Harberger, 1962. "The Incidence of the Corporation Income Tax," Journal of Political Economy, University of Chicago Press, vol. 70, pages 215.
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  36. Jack M. Mintz, 1988. "An Empirical Estimate of Corporate Tax Refundability and Effective Tax Rates," The Quarterly Journal of Economics, Oxford University Press, vol. 103(1), pages 225-231.
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