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Corporate Tax Rates, Allocative Efficiency, and Aggregate Productivity

Author

Listed:
  • Dinerstein Marcos

    (Investment Strategy Group, Vanguard Group, Paoli, PA, USA)

  • Patiño Peña Fausto

    (8420 World Bank Group , Washington, DC, USA)

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.

Suggested Citation

  • Dinerstein Marcos & Patiño Peña Fausto, 2024. "Corporate Tax Rates, Allocative Efficiency, and Aggregate Productivity," The B.E. Journal of Macroeconomics, De Gruyter, vol. 24(2), pages 633-675.
    • Handle: RePEc:bpj:bejmac:v:24:y:2024:i:2:p:633-675:n:1003
    DOI: 10.1515/bejm-2023-0138
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    More about this item

    Keywords

    aggregate productivity; allocative efficiency; corporate taxes; fiscal policy;
    All these keywords.

    JEL classification:

    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
    • O23 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Fiscal and Monetary Policy in Development
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence

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