Taxation and the life cycle of firms Articles uri icon

publication date

  • August 2019

start page

  • 114

end page

  • 130

volume

  • 105

International Standard Serial Number (ISSN)

  • 0304-3932

Electronic International Standard Serial Number (EISSN)

  • 1873-1295

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. Relative to dividends and capital gains taxation, corporate income taxation slows down firm growth over the life cycle 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. After a tax reform eliminating the corporate income tax in a revenue neutral way, output and capital increase by 12% and 32%. The large response of firm entry is crucial.

keywords

  • capital income taxation; firm dynamics; investment; macroeconomics