Could higher taxes increase the long-run demand for capital? Theory and evidence for Chile

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Abstract

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. © 2003 Elsevier B.V. All rights reserved.

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Bustos, Á., Engel, E. M. R. A., & Galetovic, A. (2004). Could higher taxes increase the long-run demand for capital? Theory and evidence for Chile. Journal of Development Economics, 73(2), 675–697. https://doi.org/10.1016/j.jdeveco.2003.06.002

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