Monday, November 25, 2019
Terry S. Moon (British Columbia) presents Capital Gains Taxes and Real Corporate Investment at UC-Berkeley today as part of its Robert D. Burch Center for Tax Policy and Public Finance Seminar Series:
This paper assesses the effects of capital gains taxes on investment by exploiting a unique institutional setting in Korea, where the capital gains tax rates vary by firm size. I use a difference-in-differences design that compares the outcomes of firms whose tax rates were reduced, due to an unanticipated reform in 2014, to the outcomes of unaffected firms. I find that firms whose capital gains tax rates dropped from 24 percent to 10 percent increased investment by 48 log points, with the implied medium-run elasticity of 2.6 with respect to the net of tax rate, and increased newly issued equity by 5 cents per dollar of lagged revenue. The effects of the tax cut were larger for firms that appeared more cash-constrained, suggesting that these firms faced a higher marginal cost of investment, and for firms that appeared to have more agency conflicts. Taken together, these findings are consistent with a class of the “traditionalview” models predicting that lower capital taxes spur equity-financed investment by increasing the marginal returns on investment.