Corporate Tax Rates, Allocative Efficiency, and Aggregate Productivity

This paper quantifies the impact of effective corporate tax rates on aggregate total factorproductivity. Using Chilean manufacturing data, the paper documents a large dispersion in the effective tax rate facedby firms and a mass of firms facing a 0 percent tax rate. These empirical patterns are incorporated into a standardmonopolistic competition model with corporate tax rates. The paper’s quantitative findings show that the TFP gainsbetween the economy implied by the Chilean tax code of 1998–2007 and a hypothetical economy without effectivecorporate tax rate inefficiencies are between 4 and 11 percent. The paper considers counterfactual policies inwhich all firms face the same tax rate and finds a monotonically decreasing relationship between the level ofthe tax rate and total factor productivity.