chirinko_02

Emory University
Department of Economics
Working Papers

Title: Corporate Taxation, Capital Formation, And The Substitution Elasticity Between Labor And Capital *
Figure 1

Number: 02-01

Author: Robert S.Chirinko

Issue Date: March 2002

Abstract: This study provides some perspective on analyzing the effects of corporate taxation on capital formation. Our framework (Figure 1) translates tax policy legislation into real outcomes, and identifies three parameters -- the price elasticity of saving (f), the capital elasticity of output (a), and the substitution elasticity between labor and capital (s) -- that play a central role in determining the impact on policy.
The remainder of the paper focuses on the latter parameter. Several of the prominent studies representing the major contours of this research area over the past 40 years are reviewed (Table 1) and, while the range of estimates has narrowed in recent years, no consensus value exists. Our review of five general equilibrium studies indicates that alternative values of s matter a great deal for the welfare changes following from proposed tax reforms (Table 2). A second and unexpected finding is that, for the four studies sensitive to the substitution elasticity, alternative values of s have similar impacts on the estimated welfare changes. The paper concludes with two lessons for tax policy analysis and some suggestions for future research.

* National Tax Journal 55 (June 2002), 339-355.

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Title:	Corporate Taxation, Capital Formation, And The Substitution Elasticity Between Labor And Capital * Figure 1
Number:	02-01
Author:	Robert S.Chirinko
Issue Date:	March 2002
Abstract:	This study provides some perspective on analyzing the effects of corporate taxation on capital formation. Our framework (Figure 1) translates tax policy legislation into real outcomes, and identifies three parameters -- the price elasticity of saving (f), the capital elasticity of output (a), and the substitution elasticity between labor and capital (s) -- that play a central role in determining the impact on policy. The remainder of the paper focuses on the latter parameter. Several of the prominent studies representing the major contours of this research area over the past 40 years are reviewed (Table 1) and, while the range of estimates has narrowed in recent years, no consensus value exists. Our review of five general equilibrium studies indicates that alternative values of s matter a great deal for the welfare changes following from proposed tax reforms (Table 2). A second and unexpected finding is that, for the four studies sensitive to the substitution elasticity, alternative values of s have similar impacts on the estimated welfare changes. The paper concludes with two lessons for tax policy analysis and some suggestions for future research.