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

  • Eduardo M. Engel

    ()

    (Yale University, Faculty of Arts & Sciences, Department of Economics (Box 8268))

  • Alvaro Bustos

    ()

    (Princeton University, Department of Economics)

  • Alexander Galetovic

    ()

    (Universidad de Chili, Center of Applied Economics (CEA))

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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Paper provided by Yale School of Management in its series Yale School of Management Working Papers with number ysm408.

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Date of creation: 28 Jul 2004
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Handle: RePEc:ysm:somwrk:ysm408
Contact details of provider: Web page: http://icf.som.yale.edu/

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  1. King, Mervyn A, 1974. "Taxation and the Cost of Capital," Review of Economic Studies, Wiley Blackwell, vol. 41(1), pages 21-35, January.
  2. Lucas, Robert E, Jr, 1990. "Supply-Side Economics: An Analytical Review," Oxford Economic Papers, Oxford University Press, vol. 42(2), pages 293-316, April.
  3. 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.
  4. 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.
  5. 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.
  6. 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.
  7. Bertola, G. & Caballero, R.J., 1990. "Kinked Adjustment Costs And Aggregate Dynamics," Discussion Papers 1990_20, Columbia University, Department of Economics.
  8. 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.
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