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Corporate Tax, Firm Destruction and Capital Stock Accumulation: Evidence From Chilean Plants, 1979-2004.

By Rodrigo A. Cerda and Diego Saravia

Abstract

We investigate the impact of corporate taxation on capital stock. In the paper, we indicate that corporate taxation might not only distort the decision of each firm to invest but could also destroy firms. With this in mind, we estimate capital demand equations, correcting for self-selection in the decision to produce by using the Heckman-Lee method and its panel data counterpart (Kyriadizou method). We use Chilean plant-level data from 1979 to 2004, which is a period with large variability in corporate taxation. We find that corporate taxation has a considerable impact on the creation-destruction of firms and in addition, it also has an important impact on the decision of how much to invest for firms that are already involved in production.

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