Taxes and Growth in a Financially Underdeveloped Country: Evidence from the Chilean Investment Boom

This article discusses the growth in investment and economic performance of Chile as a result of a corporate tax reform that cut the tax rate on retained profits from 1984 to 1986. This tax rate cut on retained profits for the said period was nearly 50 percent to 10 percent. The country has experienced an increase in savings and investment on the order of 10 percent of gross domestic product. By reducing the tax rate on retained earnings, the tax reform increased the internal funds of credit-constrained firms, which resulted to the increase in aggregate investment.