Bustos A., Engel E., Galetovic A., (2004), Could Higher Taxes Increase the Long-run Demand for Capital? Theory and Evidence for Chile, Journal of Development Economics, vol. 73, 675-697

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 longrun 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.

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