Could Higher Taxes Increase the Long-Run Demand for Capital?: Theory and Evidence for Chile

30 Pages Posted: 22 Jul 2003

See all articles by Eduardo M. R. A. Engel

Eduardo M. R. A. Engel

Yale University - Department of Economics; National Bureau of Economic Research (NBER)

Álvaro E. Bustos

Pontificia Universidad Catolica de Chile

Alexander Galetovic

Universidad Adolfo Ibáñez; Stanford University - The Hoover Institution on War, Revolution and Peace; University of Padua - CRIEP

Date Written: July 2003

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.

Keywords: Adjustment Costs, Corporate Veil, Demand for Capital, Depreciation Allowances, User Cost of Capital

JEL Classification: D21, H32

Suggested Citation

Engel, Eduardo M. and Bustos, Álvaro E. and Galetovic, Alexander, Could Higher Taxes Increase the Long-Run Demand for Capital?: Theory and Evidence for Chile (July 2003). Yale University Economic Growth Center Discussion Paper No. 858. Available at SSRN: https://ssrn.com/abstract=427080

Eduardo M. Engel (Contact Author)

Yale University - Department of Economics ( email )

28 Hillhouse Ave
New Haven, CT 06520-8268
United States
203-432-5595 (Phone)
203-432-5779 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Álvaro E. Bustos

Pontificia Universidad Catolica de Chile ( email )

Vicuna Mackena 4860. Macul
Santiago
Chile

HOME PAGE: http://https://sites.google.com/site/20bustos13/

Alexander Galetovic

Universidad Adolfo Ibáñez ( email )

Peñalolén
Santiago
Chile

Stanford University - The Hoover Institution on War, Revolution and Peace ( email )

Stanford, CA 94305-6010
United States

University of Padua - CRIEP ( email )

Padua
Italy

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