Taxation and the life cycle of firms

Andres Erosa and Beatriz González

No 1943, Working Papers from Banco de España

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 (search for similar items in EconPapers)
JEL-codes: D21 E22 E62 G32 H32 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2019-12
New Economics Papers: this item is included in nep-bec, nep-cfn, nep-dge, nep-fdg, nep-mac, nep-pbe, nep-pub and nep-sbm
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Citations: View citations in EconPapers (12)

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Related works:
Journal Article: Taxation and the life cycle of firms (2019)
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