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Abstract

The aim of this paper is to understand how different forms of taxing capital income affect investment and financial policies over the life cycle of firms. Relative to dividends and capital gains taxation, corporate income taxation slows down growth of firms by reducing after-tax profits available for reinvesting. It also diminishes entry by negatively affecting the value of entrants relative to that of incumbent firms. With these mechanisms in mind, we calibrate our model economy to the US and discuss different revenue-neutral tax reforms that would lead to increases in aggregate output and capital.