The long-run effects of corporate tax reforms

Isaac Baley and Andrés Blanco

Economics Working Papers from Department of Economics and Business, Universitat Pompeu Fabra

Abstract: 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.

Keywords: corporate taxes; investment frictions; fixed adjustment costs; irreversibility; lumpiness; capital misallocation; Tobin’s q; transitional dynamics; inaction; propagation (search for similar items in EconPapers)
JEL-codes: D30 D80 E20 E30 (search for similar items in EconPapers)
Date: 2022-01
New Economics Papers: this item is included in nep-cfn, nep-mac, nep-pbe and nep-pub
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Working Paper: The Long-Run Effects of Corporate Tax Reforms (2022)
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