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Taxes and Growth in a Financially Underdeveloped Country: Evidence from the Chilean Investment Boom
This paper argues that taxation of retained profits is particularly distortionary in economies with poorly developed financial markets. In such economies, a tax on retained profits reduces the investment of financially constrained firms, investment that has marginal product greater than the after-tax market real interest rate. Contrarily, a tax on distributed profits primarily reduces the investment of financially unconstrained firms. We argue that a 1984 − 1986 reduction in the tax rate ondoi:10.3386/w12104 fatcat:4wxadutffncsziiayubuc2zn5q