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Financial leverage and corporate taxation: evidence from German corporate tax return data

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  • Nadja Dwenger

    ()

  • Viktor Steiner

    ()

Abstract

To estimate the impact of profit taxation on the financial leverage of corporations, this study uses a pseudopanel constructed from comprehensive corporate tax return microdata for the period 1998–2001, which saw the introduction of major corporate tax reform in Germany. Financial leverage refers to the ratio of long-term debt to total capital. The endogeneity of the firm-specific marginal after-financing corporate income tax rate is controlled for by an instrumental variable approach. The instrument for the observed marginal tax rate is the counterfactual tax rate that a corporation would have faced in a particular period had there been no endogenous change, triggered by the tax reform, of its financial leverage and tax base. This counterfactual tax rate is derived from a detailed microsimulation model of the corporate sector, based on tax return microdata. The marginal tax rate has a statistically significant and relatively large positive effect on corporate leverage; for firms reporting positive profits, an increase of the marginal tax rate of 1 % would increase the financial leverage by approximately 0.7 %, on average. The debt ratio is less responsive to tax incentives for small corporations and firms facing high economic risks. Copyright Springer Science+Business Media New York 2014

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Bibliographic Info

Article provided by Springer in its journal International Tax and Public Finance.

Volume (Year): 21 (2014)
Issue (Month): 1 (February)
Pages: 1-28

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Handle: RePEc:kap:itaxpf:v:21:y:2014:i:1:p:1-28

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Web page: http://www.springerlink.com/link.asp?id=102915

Related research

Keywords: Financial structure; Debt ratio; Corporate income taxation; Corporate tax return data; Microsimulation; H25; H32; G32; G38;

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Cited by:
  1. Matthias Stöckl & Hannes Winner, . "Capital Structure and Corporate Taxation. Empirical Evidence from European Panel Data," WIFO Working Papers 422, WIFO.
  2. Lars P. Feld & Jost Henrich Heckemeyer & Michael Overesch, 2011. "Capital Structure Choice and Company Taxation: A Meta-Study," CESifo Working Paper Series 3400, CESifo Group Munich.
  3. Dwenger, Nadja & Steiner, Viktor, 2012. "Profit Taxation And The Elasticity Of The Corporate Income Tax Base: Evidence From German Corporate Tax Return Data," National Tax Journal, National Tax Association, vol. 65(1), pages 118-50, March.
  4. Frank M. Fossen & Martin Simmler, 2012. "Differential Taxation and Firms' Financial Leverage: Evidence from the Introduction of a Flat Tax on Interest Income," Discussion Papers of DIW Berlin 1190, DIW Berlin, German Institute for Economic Research.
  5. Matthias Stöckl & Hannes Winner, 2013. "Koerperschaftsbesteuerung und Unternehmensverschuldung: Evidenz aus einem Europaeischen Firmenpanel," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), Justus-Liebig University Giessen, Department of Statistics and Economics, vol. 233(2), pages 188-205, March.

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