Working Paper: NBER ID: w0576
Authors: Roger H. Gordon; Burton G. Malkiel
Abstract: This paper analyzes the effects of the federal tax structure on corporate financial and investment behavior. We first develop a model of corporate behavior given taxes, taking into account both uncertainty and costs of bankruptcy. Simpler models abstracting from bankruptcy costs had clear counterfactual implications. The forecasts from our model proved to be consistent with both the observed cross-sectional variation in debt-equity ratios and the time series pattern of debt-equity ratios (data that were constructed in the paper). We then attempted to measure the efficiency costs created by corporate tax distortions as implied by the model. The forecasted efficiency cost of the distortion favoring debt finance seemed to be quite large, while the tax distortion affecting investment seemed to be less important than others have claimed. The paper concludes with a study of the efficiency implications of various proposed corporate tax changes.
Keywords: Taxation; Corporate Finance; Investment Behavior
JEL Codes: H25; G32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Federal tax structure (H20) | Corporate financial policy (G32) |
| Tax policy (H29) | Corporate financing choices (G32) |
| Tax structure (H20) | Corporate behavior (L20) |
| Tax policy (H29) | Corporate financial outcomes (G39) |
| Tax distortions favoring debt (H31) | Efficiency costs (D61) |
| Tax structure (H20) | Debt-equity ratios (G32) |