Working Paper: NBER ID: w3501
Authors: Hanswerner Sinn
Abstract: This paper is a critical survey of the recent literature on the tax effects on corporate finance and investment decisions. It corrects a common misinterpretation of the "new" view, emphasizes the cushion effect of financial optimization, dismisses the view that optimizing firms behave as if they maximized their cost of finance, studies the role of immature firms, questions the alleged support of the old view by the occurrence of share repurchases, comments on a potential US budget compromise, and suggests the idea of a Political Miller Equilibrium.
Keywords: taxation; cost of capital; corporate finance; investment decisions
JEL Codes: H25; G31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Corporate taxation (H25) | Investment decisions (G11) |
| Double taxation (H29) | Cost of capital (G31) |
| Retained earnings (G35) | Cost of capital (G31) |
| Distributed profits (D33) | Cost of capital (G31) |
| New share issues (G24) | Cost of capital (G31) |
| Internal investment (G31) | Cost of capital (G31) |
| Tax context (H25) | Cost of capital (G31) |