Taxation and the Life Cycle of Firms

38 Pages Posted: 12 Dec 2019

See all articles by Andrés Erosa

Andrés Erosa

Universidad Carlos III de Madrid - Department of Economics

Beatriz González

Banco de España

Date Written: December 11, 2019

Abstract

The Hopenhayn and Rogerson (1993) framework is extended to understand how different forms of taxing capital income affect firms’ investment and financial policies over their life cycle. Corporate income taxation slows down firm growth over the life cycle by reducing after-tax profits available for reinvesting, and it distorts optimal firms’ size. Dividend income taxation reduces external equity financing, but it does not affect size at maturity. Capital gains taxes make firms start larger, so that internal growth is lower. With these mechanisms in mind, we calibrate our economy to the US and discuss different revenue-neutral tax reforms that might lead to increases in aggregate output and capital.

Keywords: macroeconomics, capital income taxation, firm dynamics, investment

JEL Classification: D21, E22, E62, G32, H32

Suggested Citation

Erosa, Andrés and González, Beatriz, Taxation and the Life Cycle of Firms (December 11, 2019). Banco de Espana Working Paper No. 1943 (2019). Available at SSRN: https://ssrn.com/abstract=3502293 or http://dx.doi.org/10.2139/ssrn.3502293

Andrés Erosa (Contact Author)

Universidad Carlos III de Madrid - Department of Economics ( email )

Calle Madrid 126
Getafe, 28903
Spain

Beatriz González

Banco de España ( email )

Alcala 50
Madrid 28014
Spain

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