Corporate Firm Taxation, Firms Destruction and Long Run Capital Stock

We study the impact of corporate firm taxation over long run capital accumulation and firms dynamics in an heterogeneous firms environment. We assume there are firms with different levels of productivity choosing investment on physical capital and facing an exogenous corporate tax rate. By means of numerical methods, we show that the tax system has a large impact on national investment rate and significantly affect the stock of capital of long term of the economy. The are two forces producing the result. Firstly, the corporate tax rate produces the usual distortion on the user cost of capital, as in Jorgenson (1963), and secondly, the existence of the corporate tax rate might even produce firm’s destruction, as it reduces after tax profits and thus firms become not profitable. This second channel is an extensive margin effect which may have a larger impact on aggregate investment rate and long run capital stock, than the usual distortion on the user cost of capital stressed on the literature.