Is the Tax Credit for SME in Chile an Effective Policy to Boost Investment?

Abstract

This paper evaluates the effect of the investment tax credit on investment decisions of small and medium enterprises (SME) and recommends future steps to the Chilean Government. Although this instrument has existed since 1990 and is available to all firms, the investment tax credit rate has recently been temporarily increased from 6% to 8% exclusively for SME. Using a sharp discontinuity regression design and administrative data, we estimate that this policy increased investment among non credit constrained firms by 30%. Our estimates suggest that 14.7% of the additional investment was financed with fiscal resources. The analysis also shows that the investment tax credit is more effective in targeting resources towards SME than alternative polices such as a bonus depreciation allowance, a cash flow based system and a corporate tax reduction.