Taxation and the life cycle of firms

Taxation and the life cycle of firms

Series: Working Papers. 1943.

Author: Andrés Erosa and Beatriz González.

Published in: Journal of Monetary Economics, Volume 105, August 2019, Pages 114-130Opens in new window

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Taxation and the life cycle of firms (693 KB)

Abstract

The Hopenhayn and Rogerson (1993) framework is extended to understand how different
forms of taxing capital income affect firms’ investment and financial policies over their life
cycle. Corporate income taxation slows down firm growth over the life cycle by reducing
after-tax profits available for reinvesting, and it distorts optimal firms’ size. Dividend income
taxation reduces external equity financing, but it does not affect size at maturity. Capital
gains taxes make firms start larger, so that internal growth is lower. With these mechanisms
in mind, we calibrate our economy to the US and discuss different revenue-neutral tax
reforms that might lead to increases in aggregate output and capital.

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