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The Effect of Taxation on Corporate Financing and Investment

Author

Listed:
  • Hong Chen
  • Murray Z Frank

Abstract

Extensive empirical research concerning the impact of taxes on corporate decisions has had trouble identifying seemingly obvious effects. Perhaps the problem is that the seemingly obvious tax predictions are not quite right. We provide an equilibrium model with both corporate and personal taxes. In the steady-state equilibrium, the corporate tax rate affects the level of production despite interest deductibility at the firm level, but not household-level taxes on interest earnings or dividends. We prove several other tax irrelevance results and document a Laffer curve in the corporate tax rate. (JEL G31, G32, G35)

Suggested Citation

  • Hong Chen & Murray Z Frank, 2022. "The Effect of Taxation on Corporate Financing and Investment," The Review of Corporate Finance Studies, Society for Financial Studies, vol. 11(1), pages 47-87.
    • Handle: RePEc:oup:rcorpf:v:11:y:2022:i:1:p:47-87.
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    File URL: http://hdl.handle.net/10.1093/rcfs/cfab005
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    More about this item

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy

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