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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

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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Bibliographic Info

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 Taxation and the Cost of Capital: The "Old" View, the "New" View, and Another View , Hans-Werner Sinn. in Tax Policy and the Economy, Volume 5 , Bradford. 1991
Handle: RePEc:nbr:nberwo:3501

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  1. DeAngelo, Harry & Masulis, Ronald W., 1980. "Optimal capital structure under corporate and personal taxation," Journal of Financial Economics, Elsevier, Elsevier, vol. 8(1), pages 3-29, March.
  2. James M. Poterba & Lawrence H. Summers, 1984. "The Economic Effects of Dividend Taxation," Working papers 343, Massachusetts Institute of Technology (MIT), Department of Economics.
  3. Goulder, Lawrence H. & Summers, Lawrence H., 1989. "Tax policy, asset prices, and growth : A general equilibrium analysis," Journal of Public Economics, Elsevier, Elsevier, vol. 38(3), pages 265-296, April.
  4. Auerbach, Alan J, 1979. "Wealth Maximization and the Cost of Capital," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 93(3), pages 433-46, August.
  5. Murray C. Kemp, 1962. "Foreign Investment And The National Advantage," The Economic Record, The Economic Society of Australia, The Economic Society of Australia, vol. 38(81), pages 56-62, 03.
  6. G. D. A. MacDougall, 1960. "THE BENEFITS and COSTS OF PRIVATE INVESTMENT FROM ABROAD: A THEORETICAL APPROACH," The Economic Record, The Economic Society of Australia, The Economic Society of Australia, vol. 36(73), pages 13-35, 03.
  7. James M. Poterba, 1987. "Tax Policy and Corporate Saving," Working papers 470, Massachusetts Institute of Technology (MIT), Department of Economics.
  8. Mark Gertler & R. Glenn Hubbard, 1990. "Taxation, Corporate Capital Structure, and Financial Distress," NBER Chapters, in: Tax Policy and the Economy: Volume 4, pages 43-72 National Bureau of Economic Research, Inc.
  9. Edwards, J S S & Keen, M J, 1984. "Wealth Maximization and the Cost of Capital: A Comment," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 99(1), pages 211-14, February.
  10. King, Mervyn A, 1974. "Taxation and the Cost of Capital," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 41(1), pages 21-35, January.
  11. Howitt, Peter & Sinn, Hans-Werner, 1989. "Gradual Reforms of Capital Income Taxation," Munich Reprints in Economics, University of Munich, Department of Economics 19370, University of Munich, Department of Economics.
  12. Stiglitz, Joseph E., 1973. "Taxation, corporate financial policy, and the cost of capital," Journal of Public Economics, Elsevier, Elsevier, vol. 2(1), pages 1-34, February.
  13. Miller, Merton H, 1977. "Debt and Taxes," Journal of Finance, American Finance Association, American Finance Association, vol. 32(2), pages 261-75, May.
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