Corporate taxes and the demand for labor and capital in developing countries

This article provides evidence about the impact of corporate taxation on both labor and capital demand by private companies in a developing economy, using firm level data from Chile. Our results show that higher corporate tax rates reduce not only the demand for capital, but also the demand for labor due to complementarities between both inputs. An interesting element of the results presented in this article is the asymmetry between the effects of taxation according to company size. The impact on labor demand is significantly higher in large corporations than in small enterprises, while the demand for capital is more responsive to corporate tax changes in small firms. We can explain these results based on differences in credit constraints according to firm size.