The Credit Channel of Tax Policy
AbstractA neoclassical growth model is augmented by a corporate sector, financial intermediation, and a set of tax rates. In this setting, capital structure is determined by the interplay between an advantage of debt finance resulting from the tax system and a disadvantage resulting from asymmetric information and the entailed agency costs. Effects of capital tax reforms are investigated with a special focus on the credit channel that operates through the finance decision of firms. The theoretical part of the article derives which financial and real effects of private and corporate income tax policies can be expected. Using a calibration with U.S.\ data, the applied part demonstrates that tax cuts cause significant adjustments of capital structure. Nevertheless, the credit channel creates relatively small effects of tax reforms on consumption, investment, and growth.
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Bibliographic InfoPaper provided by Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät in its series Hannover Economic Papers (HEP) with number dp-368.
Length: 27 pages
Date of creation: Jun 2007
Date of revision:
Tax Reform; Corporate Finance; Agency Costs; Ecinomic Growth;
Find related papers by JEL classification:
- H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
- O16 - Economic Development, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-07-07 (All new papers)
- NEP-DGE-2007-07-07 (Dynamic General Equilibrium)
- NEP-MAC-2007-07-07 (Macroeconomics)
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