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Could Higher Taxes Increase the Long-Run Demand for Capital? Theory and Evidence for Chile"


  • Alvaro Bustos
  • Eduardo Engel

    () (Economic Growth Center, Yale University)

  • Alexander Galetovic


On theoretical grounds alone, there is no a priori reason why higher taxes should reduce the desired capital stock, since a tax increase reduces marginal returns but also increases depreciation and interest payment allowances. Using a panel of Chilean corporations, this paper estimates a long-run demand for capital valid for a general adjustment-cost structure. Changes in the corporate tax rate are found to have no effect on the long run demand for capital. Furthermore, when making investment decisions, firms ignore the marginal rates paid by their stockholders, suggesting the presence of a corporate veil.
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Suggested Citation

  • Alvaro Bustos & Eduardo Engel & Alexander Galetovic, 2003. "Could Higher Taxes Increase the Long-Run Demand for Capital? Theory and Evidence for Chile"," Working Papers 858, Economic Growth Center, Yale University.
  • Handle: RePEc:egc:wpaper:858

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    References listed on IDEAS

    1. Chang-Tai Hsieh & Jonathan A. Parker, 2007. "Taxes and Growth in a Financially Underdeveloped Country: Evidence from the Chilean Investment Boom," ECONOMIA JOURNAL OF THE LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION, ECONOMIA JOURNAL OF THE LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION, vol. 0(Fall 2007), pages 1-53, August.
    2. Jorgenson, D.W., 1992. "Tax Reform and the Cost of Capital : An International Comparison," Harvard Institute of Economic Research Working Papers 1621, Harvard - Institute of Economic Research.
    3. Engel, Eduardo M. R. A. & Galetovic, Alexander & Raddatz, Claudio E., 1999. "Taxes and income distribution in Chile: some unpleasant redistributive arithmetic," Journal of Development Economics, Elsevier, vol. 59(1), pages 155-192, June.
    4. Lucas, Robert E, Jr, 1990. "Supply-Side Economics: An Analytical Review," Oxford Economic Papers, Oxford University Press, vol. 42(2), pages 293-316, April.
    5. Mervyn A. King, 1974. "Taxation and the Cost of Capital," Review of Economic Studies, Oxford University Press, vol. 41(1), pages 21-35.
    6. Giuseppe Bertola & Ricardo J. Caballero, 1990. "Kinked Adjustment Costs and Aggregate Dynamics," NBER Chapters,in: NBER Macroeconomics Annual 1990, Volume 5, pages 237-296 National Bureau of Economic Research, Inc.
    7. 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.
    8. Alan J. Auerbach, 1983. "Corporate Taxation in the United States," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 14(2), pages 451-514.
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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. Cai, Jing & Harrison, Ann, 2011. "The value-added tax reform puzzle," Policy Research Working Paper Series 5788, The World Bank.
    4. Panousi, Vasia, 2009. "Capital Taxation with Entrepreneurial Risk," MPRA Paper 24237, University Library of Munich, Germany.
    5. 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.
    6. repec:clp:wpaper:wp31 is not listed on IDEAS
    7. Rodrigo A. Cerda & Diego Saravia, 2009. "Corporate Tax, Firm Destruction and Capital Stock Accumulation: Evidence From Chilean Plants, 1979-2004," Working Papers Central Bank of Chile 521, Central Bank of Chile.
    8. repec:clp:wpaper:wp1 is not listed on IDEAS
    9. Cristobal Marshall, 2010. "Is the Tax Credit for SME in Chile an Effective Policy to Boost Investment?," CID Working Papers 46, Center for International Development at Harvard University.
    10. Carlos Garcia & Jorge Restrepo, 2007. "How Effective is Government Spending in a Small Open Economy with Distortionary Taxes," ILADES-Georgetown University Working Papers inv188, Ilades-Georgetown University, Universidad Alberto Hurtado/School of Economics and Bussines.
    11. 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.
    12. Jose De Gregorio, 2004. "Economic Growth in Chile: Evidence, Sources and Prospects," Working Papers Central Bank of Chile 298, Central Bank of Chile.
    13. Rodrigo Cerda & Felipe Larrain, 2010. "Corporate taxes and the demand for labor and capital in developing countries," Small Business Economics, Springer, vol. 34(2), pages 187-201, February.
    14. Yongzheng Liu & Jorge Martinez-Vazquez, 2010. "The Growth-Inequality Tradeo in the Design of Tax Structure: Evidence from a Large Panel of Countries," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper1320, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.

    More about this item

    JEL classification:

    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory


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