Corporate Tax Rates, Allocative Efficiency, and Aggregate Productivity

Dinerstein Marcos () and Patiño Peña Fausto ()
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Dinerstein Marcos: Investment Strategy Group, Vanguard Group, Paoli, PA, USA
Patiño Peña Fausto: 8420 World Bank Group , Washington, DC, USA

The B.E. Journal of Macroeconomics, 2024, vol. 24, issue 2, 633-675

Abstract: This paper quantifies the impact of effective corporate tax rates on aggregate total factor productivity (TFP). Using Chilean manufacturing data, we document a large dispersion in the effective tax rate faced by firms and a mass of firms facing a 0 percent tax rate. We integrate these findings into a standard monopolistic competition model, where firms are subject to corporate taxation and also face output and capital wedges, which represent all other distortions present in the economy. We find that eliminating corporate tax rates increases TFP between 4 and 11 percent. We consider counterfactual policies in which firms face a uniform flat tax rate and find a monotonically decreasing relationship between the level of the tax rate and TFP.

Keywords: aggregate productivity; allocative efficiency; corporate taxes; fiscal policy (search for similar items in EconPapers)
JEL-codes: D24 H25 H32 O23 O47 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1515/bejm-2023-0138

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