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The Tax Elasticity of Corporate Debt: A Synthesis of Size and Variations

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  • Ruud A. de Mooij

Abstract

Although the empirical literature has long struggled to identify the impact of taxes on corporate financial structure, a recent boom in studies offers ample support for the debt bias of taxation. Yet, studies differ considerably in effect size and reveal an equally large variety in methodologies and specifications. This paper sheds light on this variation and assesses the systematic impact on the size of the effects. We find that, typically, a one percentage point higher tax rate increases the debt-asset ratio by between 0.17 and 0.28. Responses are increasing over time, which suggests that debt bias distortions have become more important.

Suggested Citation

  • Ruud A. de Mooij, 2011. "The Tax Elasticity of Corporate Debt: A Synthesis of Size and Variations," IMF Working Papers 2011/095, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2011/095
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    References listed on IDEAS

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    1. MacKie-Mason, Jeffrey K, 1990. "Do Taxes Affect Corporate Financing Decisions?," Journal of Finance, American Finance Association, vol. 45(5), pages 1471-1493, December.
    2. Kane, Alex & Marcus, Alan J. & McDonald, Robert L., 1985. "Debt Policy and the Rate of Return Premium to Leverage," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 20(4), pages 479-499, December.
    3. Graham, John R., 1996. "Debt and the marginal tax rate," Journal of Financial Economics, Elsevier, vol. 41(1), pages 41-73, May.
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