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Is the Tax Credit for SME in Chile an Effective Policy to Boost Investment?

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  • Cristobal Marshall

Abstract

This paper evaluates the effect of the investment tax credit on investment decisions of small and medium enterprises (SME) and recommends future steps to the Chilean Government. Although this instrument has existed since 1990 and is available to all firms, the investment tax credit rate has recently been temporarily increased from 6% to 8% exclusively for SME. Using a sharp discontinuity regression design and administrative data, we estimate that this policy increased investment among non credit constrained firms by 30%. Our estimates suggest that 14.7% of the additional investment was financed with fiscal resources. The analysis also shows that the investment tax credit is more effective in targeting resources towards SME than alternative polices such as a bonus depreciation allowance, a cash flow based system and a corporate tax reduction.

Suggested Citation

  • Cristobal Marshall, 2010. "Is the Tax Credit for SME in Chile an Effective Policy to Boost Investment?," CID Working Papers 46, Center for International Development at Harvard University.
    • Handle: RePEc:cid:wpfacu:46
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    References listed on IDEAS

    as
    1. Rodrigo Cerda & Felipe Larraín, 2005. "Inversión Privada e Impuestos Corporativos: Evidencia para Chile," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 42(126), pages 257-281.
    2. Bustos, Alvaro & Engel, Eduardo M. R. A. & Galetovic, Alexander, 2004. "Could higher taxes increase the long-run demand for capital? Theory and evidence for Chile," Journal of Development Economics, Elsevier, vol. 73(2), pages 675-697, April.
    3. Darrel Cohen & Jason G. Cummins, 2006. "A retrospective evaluation of the effects of temporary partial expensing," Finance and Economics Discussion Series 2006-19, Board of Governors of the Federal Reserve System (U.S.).
    4. Kevin A. Hassett, 1999. "Tax Policy and Investment," Books, American Enterprise Institute, number 53049, September.
    5. Christopher L. House & Matthew D. Shapiro, 2008. "Temporary Investment Tax Incentives: Theory with Evidence from Bonus Depreciation," American Economic Review, American Economic Association, vol. 98(3), pages 737-768, June.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    investment; tax incentives; tax credits; fiscal policy; regression discontinuity; small and medium enterprises; Chile;
    All these keywords.

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • O23 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Fiscal and Monetary Policy in Development
    • O54 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Latin America; Caribbean

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