Taxation and the Life Cycle of Firms
38 Pages Posted: 12 Dec 2019
Date Written: December 11, 2019
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
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