Álvaro Bustos, Eduardo Engel, Alexander Galetovic
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Abstract
This paper estimates a long-run demand for capital in Chile, and studies the responsiveness of firms’ desired capital stock to variations in tax rates. We combine the neoclassical model with a cointegration argument to obtain a long-run demand for capital that is valid for a general cost adjustment structure. The main conclusion of the theoretical analysis is that there is no a priori reason to think that higher taxes reduce the demand for capital. This conclusion is valid whether firms ignore marginal rates faced by their stockholders or incorporate them.
The model is estimated with a panel of Chilean corporations with annual data between 1985 and 1995. Results obtained are consistent with theoretical predictions: an increase in the corporate tax rate from 0 to 20%, reduces the desired capital stock by less than 0.2%. We also find that firms ignore the marginal rates their stockholders pay when they make investment decisions, i.e. there is a corporate veil.
Key words: demand for capital, user cost of capital, corporate veil, adjustment costs
JEL classification: D21, H32