This was part of Aggregate Dynamics in Models with Heterogeneous Agents

The Macroeconomic Effects of Corporate Tax Reforms

Isaac Baley, Universitat Pompeu Fabra

Wednesday, October 27, 2021

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 tax and firm-level investment data from Chile, we discover that a lower corporate income tax improves capital allocation, reduces capital valuation, and accelerates capital fluctuations.