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Taxation and the Cost of Capital: The "Old" View, the "New" View and Another View

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Hans-Werner Sinn

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Abstract

This paper is a critical survey of the recent literature on the tax effects on corporate finance and investment decisions. It corrects a common misinterpretation of the "new" view, emphasizes the cushion effect of financial optimization, dismisses the view that optimizing firms behave as if they maximized their cost of finance, studies the role of immature firms, questions the alleged support of the old view by the occurrence of share repurchases, comments on a potential US budget compromise, and suggests the idea of a Political Miller Equilibrium.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3501.

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Date of creation: Dec 1991
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Publication status: published as Tax Policy and the Economy, Vol. 5, edited by David Bradford, pp. 25-54. Cambridge, MA: MIT Press, 1991.
Handle: RePEc:nbr:nberwo:3501

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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. David F. Bradford, 1981. "The Economics of Tax Policy toward Savings," NBER Reprints 0141, National Bureau of Economic Research, Inc.
  2. James M. Poterba & Lawrence H. Summers, 1985. "The Economic Effects of Dividend Taxation," NBER Working Papers 1353, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  3. King, Mervyn A, 1974. "Taxation and the Cost of Capital," Review of Economic Studies, Blackwell Publishing, vol. 41(1), pages 21-35, January. [Downloadable!] (restricted)
  4. Edwards, J S S & Keen, M J, 1984. "Wealth Maximization and the Cost of Capital: A Comment," The Quarterly Journal of Economics, MIT Press, vol. 99(1), pages 211-14, February. [Downloadable!] (restricted)
  5. Stiglitz, Joseph E., 1973. "Taxation, corporate financial policy, and the cost of capital," Journal of Public Economics, Elsevier, vol. 2(1), pages 1-34, February. [Downloadable!] (restricted)
  6. James M. Poterba, 1987. "Tax Policy and Corporate Saving," Working papers 470, Massachusetts Institute of Technology (MIT), Department of Economics.
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  7. DeAngelo, Harry & Masulis, Ronald W., 1980. "Optimal capital structure under corporate and personal taxation," Journal of Financial Economics, Elsevier, vol. 8(1), pages 3-29, March. [Downloadable!] (restricted)
  8. Howitt, Peter & Sinn, Hans-Werner, 1989. "Gradual Reforms of Capital Income Taxation," American Economic Review, American Economic Association, vol. 79(1), pages 106-24, March. [Downloadable!] (restricted)
  9. Mark L. Gertler & R. Glenn Hubbard, 1990. "Taxation, Corporate Capital Structure, and Financial Distress," NBER Working Papers 3202, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  10. Miller, Merton H, 1977. "Debt and Taxes," Journal of Finance, American Finance Association, vol. 32(2), pages 261-75, May. [Downloadable!] (restricted)
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Cited by:
(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. Michael Funke, 2002. "Determining Taxation and Investment Impacts of Estonia's 2000 Income Tax Reform," Finnish Economic Papers, Finnish Society for Economic Research, vol. 15(2), pages 102-109, Autumn. [Downloadable!]
  2. Henrekson, Magnus & Sanandaji, Tino, 2008. "Taxing Entrepreneurial Income," Working Paper Series 732, Research Institute of Industrial Economics. [Downloadable!]
  3. Brys, Bert & Bovenberg, A. Lans, 2006. "The life cycle of the firm with debt and capital income taxes," Discussion Paper 91, Tilburg University, Center for Economic Research. [Downloadable!]
  4. Trevor S. Harris & R. Glenn Hubbard & Deen Kemsley, 1999. "The Share Price Effects of Dividend Taxes and Tax Imputation Credits," NBER Working Papers 7445, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  5. Ellen R. McGrattan & Edward C. Prescott, 2004. "Taxes, Regulations, and the Value of U.S. and U.K. Corporations," Levine's Bibliography 122247000000000715, UCLA Department of Economics. [Downloadable!]
    Other versions:
  6. Alan J. Auerbach & Kevin A. Hassett, 2000. "On the Marginal Source of Investment Funds," NBER Working Papers 7821, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  7. Lindhe, Tobias, 2002. "Methods of Mitigating Double Taxation," Working Paper Series 2002:8, Uppsala University, Department of Economics. [Downloadable!]
  8. Randall Morck, 2003. "Why Some Double Taxation Might Make Sense: The Special Case of Inter-corporate Dividends," NBER Working Papers 9651, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  9. Howell Zee, 1998. "Revenue, Efficiency, and Equity Aspects of Major Taxes in Chile: A Preliminary Assessment," Working Papers Central Bank of Chile 42, Central Bank of Chile. [Downloadable!]
  10. Karl Ove Aarbu and Thor Olav Thoresen, 1997. "The Norwegian Tax Reform; Distributional Effects and the High-income Response," Discussion Papers 207, Research Department of Statistics Norway. [Downloadable!]
  11. Schreiber, Ulrich & Spengel, Christoph & Lammersen, Lothar, 2001. "Effektive Steuerbelastungen bei Vorliegen ökonomischer Renten," ZEW Discussion Papers 01-26, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research. [Downloadable!]
  12. Alan D. Viard, 2000. "The transition to consumption taxation, part 1: the impact on existing capital," Economic and Financial Policy Review, Federal Reserve Bank of Dallas, issue Q3, pages 2-22. [Downloadable!]
  13. Martin D. Dietz & Christian Keuschnigg, 2004. "Corporate Income Tax Reform in Switzerland," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 140(IV), pages 483-519, December. [Downloadable!]
    Other versions:
  14. Ernst Fehr & Wolfgang Wiegard, 2001. "The Incidence of an Extended Ace Corporation Tax," CESifo Working Paper Series CESifo Working Paper No. , CESifo GmbH. [Downloadable!]
  15. Erik Fjærli and Rolf Aaberge, 2000. "Tax Reforms, Dividend Policy and Trends in Income Inequality Empirical Evidence based on Norwegian Data," Discussion Papers 284, Research Department of Statistics Norway. [Downloadable!]
  16. Alvarez JR, Luis & Kanniainen, Vesa & Södersten, Jan, 2000. "Why is the Corporation Tax Not Neutral? Anticipated Tax Reform, Investment Spurts and Corporate Borrowing," Working Paper Series 2000:4, Uppsala University, Department of Economics. [Downloadable!]
    Other versions:
  17. Doina Maria Radulescu & Michael Stimmelmayr, 2006. "ACE vs. CBIT: Which is Better for Investment and Welfare?," CESifo Working Paper Series CESifo Working Paper No. , CESifo GmbH. [Downloadable!]
  18. Vesa Kanniainen & Seppo Kari & Jouko Ylä-Liedenpohja, 2005. "The Start-Up and Growth Stages in Enterprise Formation: The New View of Dividend Taxation Reconsidered," CESifo Working Paper Series CESifo Working Paper No. , CESifo GmbH. [Downloadable!]
  19. Vesa Kanniainen & Seppo Kari & Jouko Ylä-Liedenpohja, 2005. "Nordic Dual Income Taxation of Entrepreneurs," CESifo Working Paper Series CESifo Working Paper No. , CESifo GmbH. [Downloadable!]
    Other versions:
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