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Corporate Tax Rates, Allocative Efficiency, and Aggregate Productivity

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  • Dinerstein,Marcos
  • Patino Pena,Fausto Andres

Abstract

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.

Suggested Citation

  • Dinerstein,Marcos & Patino Pena,Fausto Andres, 2023. "Corporate Tax Rates, Allocative Efficiency, and Aggregate Productivity," Policy Research Working Paper Series 10394, The World Bank.
    • Handle: RePEc:wbk:wbrwps:10394
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    References listed on IDEAS

    as
    1. Chang-Tai Hsieh & Jonathan A. Parker, 2007. "Taxes and Growth in a Financially Underdevelopped Country: Evidence from the Chilean Investment Boom," Economía Journal, The Latin American and Caribbean Economic Association - LACEA, vol. 0(Fall 2007), pages 1-54, August.
    2. Amil Petrin & Jagadeesh Sivadasan, 2013. "Estimating Lost Output from Allocative Inefficiency, with an Application to Chile and Firing Costs," The Review of Economics and Statistics, MIT Press, vol. 95(1), pages 286-301, March.
    3. Jack Rossbach & Jose Asturias, 2017. "Misallocation in the Presence of Multiple Production Technologies," 2017 Meeting Papers 1094, Society for Economic Dynamics.
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