Working Paper: CEPR ID: DP16936
Authors: Isaac Baley; Andres Blanco
Abstract: We investigate the long-run effects of permanent corporate tax reforms on aggregate capital behavior. In an investment model with fixed adjustment costs and partial irreversibility, we show that corporate taxes and investment frictions jointly determine three interconnected macroeconomic outcomes: (i) capital allocation, (ii) capital valuation, and (iii) capital fluctuations around steady-state. Using corporate tax and firm-level investment data from Chile, we discover that a lower corporate income tax improves the allocation of capital, reduces capital valuation, and accelerates capital fluctuations.
Keywords: Corporate Taxes; Investment Frictions; Fixed Adjustment Costs; Irreversibility; Lumpiness; Capital Misallocation; Tobin's Q; Transitional Dynamics; Inaction Propagation
JEL Codes: D30; D80; E20; E30
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| lower corporate income tax rates (K34) | improve capital allocation (G31) |
| lower corporate income tax rates (K34) | decrease misallocation (D61) |
| lower corporate income tax rates (K34) | raise frictionless profits (D33) |
| raise frictionless profits (D33) | decrease firms' effective fixed costs (D21) |
| lower corporate taxes (H32) | decrease capital valuation (G32) |
| decrease capital valuation (G32) | decrease Tobin's Q (G19) |
| lower corporate income tax rates (K34) | reduce cumulative impulse response to productivity shocks (E24) |
| observable micro-moments (D16) | predict aggregate capital behavior (E22) |