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Why Is the Corporate Tax Rate Lower than the Personal Tax Rate?

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Author Info
Clemens Fuest
Bernd Huber
Søren Bo Nielsen

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Abstract

In many OECD countries, statutory corporate tax rates are lower than personal income tax rates. The present paper argues that this tax rate differentiation is an optimal tax policy if there are problems of asymmetric information between investors and firms in the capital market. The reduction of the corporate tax rate below the personale tax rate encourages equity financing and thus mitigates the excessive use of debt financing induced by asymmetric information. Our main theoretical result stands in marked contrast to the traditional view of corporate taxation and corporate finance theory, according to which there is a tax disadvantage to equity financing. More recent empirical evidence on this issue, however, is in line with our result.

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Paper provided by Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics in its series EPRU Working Paper Series with number 00-17.

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Handle: RePEc:kud:epruwp:00-17

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Roger H. Gordon & Jeffrey K. MacKie-Mason, 1992. "Tax Distortions to the Choice of Organizational Form," NBER Working Papers 4227, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  2. Martin Feldstein & Joel Slemrod, 1980. "Personal Taxation, Portfolio Choice and The Effect of the Corporation Income Tax," NBER Working Papers 0241, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  3. Roger H. Gordon & Joel Slemrod, 1998. "Are "Real" Responses to Taxes Simply Income Shifting Between Corporate and Personal Tax Bases?," NBER Working Papers 6576, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  4. Gordon, Roger H, 1986. "Taxation of Investment and Savings in a World Economy," American Economic Review, American Economic Association, vol. 76(5), pages 1086-1102, December. [Downloadable!] (restricted)
  5. Gordon, Roger H. & Lee, Young, 2001. "Do taxes affect corporate debt policy? Evidence from U.S. corporate tax return data," Journal of Public Economics, Elsevier, vol. 82(2), pages 195-224, November. [Downloadable!] (restricted)
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  6. Roger Gordon, 1998. "Can High Personal Tax Rates Encourage Entrepreneurial Activity?," IMF Staff Papers, Palgrave Macmillan Journals, vol. 45(1), pages 2. [Downloadable!] (restricted)
  7. Graham, John R., 1996. "Debt and the marginal tax rate," Journal of Financial Economics, Elsevier, vol. 41(1), pages 41-73, May. [Downloadable!] (restricted)
  8. Roger H. Gordon & A. Lans Bovenberg, 1994. "Why is Capital so Immobile Internationally?: Possible Explanations and Implications for Capital Income Taxation," NBER Working Papers 4796, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  9. Graham, John R., 1999. "Do personal taxes affect corporate financing decisions?," Journal of Public Economics, Elsevier, vol. 73(2), pages 147-185, August. [Downloadable!] (restricted)
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Félix Domínguez Barrero & Julio López Laborda & Fernando Rodrigo Sauco, 2005. "Do Corporate and Personal Income Taxes Affect Incorporation?," Hacienda Pública Española, IEF, vol. 174(3), pages 55-86, September. [Downloadable!]
  2. Michael Pfaffermayr & Matthias Stöckl & Hannes Winner, . "Capital Structure, Corporate Taxation and Firm Age," Working Papers 2008-09, Faculty of Economics and Statistics, University of Innsbruck. [Downloadable!]
    Other versions:
  3. Christian Keuschnigg & Soren Bo Nielsen, 2003. "Public Taxation and Venture Capital Backed Entrepreneurship," University of St. Gallen Department of Economics working paper series 2003 2003-17, Department of Economics, University of St. Gallen. [Downloadable!]
  4. Christian Keuschnigg & Søren Nielsen, 2004. "Taxation and Venture Capital Backed Entrepreneurship," Asia-Pacific Financial Markets, Springer, vol. 11(4), pages 369-390, August. [Downloadable!] (restricted)
    Other versions:
  5. Clemens Fuest & Bernd Huber & Philipp Tillessen, 2003. "Tax Policy and Entrepreneurship in the Presence of Asymmetric Information in Capital Markets," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  6. Alfons Weichenrieder & Tina Klautke, 2008. "Taxes and the Efficiency Costs of Capital Distortions," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
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