DP16936 The Long-Run Effects of Corporate Tax Reforms
|Author(s):||Isaac Baley, Andres Blanco|
|Publication Date:||January 2022|
|Keyword(s):||capital misallocation, corporate taxes, fixed adjustment costs, Inaction, investment frictions, Irreversibility, Lumpiness, propagation, Tobin's q, Transitional Dynamics|
|JEL(s):||D30, D80, E20, E30|
|Programme Areas:||Monetary Economics and Fluctuations|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=16936|
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.