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Taxation, Corporate Financial Policy and the Cost of Capital

  • Auerbach, Alan J

The cost of capital plays an important role in the allocation of resources among competing uses in a decentralized market system. The purpose of this paper is to organize and present what is known and what is hypothesized about the effects of taxation on the incentive to invest, via the cost of capital,taking full account of important issues that arise independently from the question of taxation. Included in the analysis is a discussion of empirical findings about the interaction of inflation and taxation in influencing the incentive to invest, and a treatment of taxation and uncertainty.

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Article provided by American Economic Association in its journal Journal of Economic Literature.

Volume (Year): 21 (1983)
Issue (Month): 3 (September)
Pages: 905-40

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Handle: RePEc:aea:jeclit:v:21:y:1983:i:3:p:905-40
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  1. 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.
  2. Modigliani, Franco, 1982. " Debt, Dividend Policy, Taxes, Inflation and Market Valuation," Journal of Finance, American Finance Association, vol. 37(2), pages 255-73, May.
  3. Lippman, Steven A. & McCall, John J., 1981. "Progressive taxation in sequential decisionmaking : Deterministic and stochastic analysis," Journal of Public Economics, Elsevier, vol. 16(1), pages 35-52, August.
  4. Merton, Robert C, 1973. "An Intertemporal Capital Asset Pricing Model," Econometrica, Econometric Society, vol. 41(5), pages 867-87, September.
  5. Malkiel, Burton G, 1979. "The Capital Formation Problem in the United States," Journal of Finance, American Finance Association, vol. 34(2), pages 291-306, May.
  6. Michael C. Jensen, 1972. "Capital Markets: Theory and Evidence," Bell Journal of Economics, The RAND Corporation, vol. 3(2), pages 357-398, Autumn.
  7. Cass, David & Stiglitz, Joseph E., 1970. "The structure of investor preferences and asset returns, and separability in portfolio allocation: A contribution to the pure theory of mutual funds," Journal of Economic Theory, Elsevier, vol. 2(2), pages 122-160, June.
  8. Shoven, John B, 1976. "The Incidence and Efficiency Effects of Taxes on Income from Capital," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1261-83, December.
  9. Kopcke, Richard W, 1981. "Inflation, Corporate Income Taxation, and the Demand for Capital Assets," Journal of Political Economy, University of Chicago Press, vol. 89(1), pages 122-31, February.
  10. 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.
  11. Miller, Merton H, 1977. "Debt and Taxes," Journal of Finance, American Finance Association, vol. 32(2), pages 261-75, May.
  12. Swan, Peter L, 1970. "Durability of Consumption Goods," American Economic Review, American Economic Association, vol. 60(5), pages 884-94, December.
  13. Gordon, Roger H, 1985. "Taxation of Corporate Capital Income: Tax Revenues versus Tax Distortions," The Quarterly Journal of Economics, MIT Press, vol. 100(1), pages 1-27, February.
  14. Robin Boadway & Neil Bruce & Jack Mintz, 1982. "Taxation, Inflation and the User Cost of Capital in Canada," Working Papers 506, Queen's University, Department of Economics.
  15. William Vickrey, 1939. "Averaging of Income for Income-Tax Purposes," Journal of Political Economy, University of Chicago Press, vol. 47, pages 379.
  16. David F. Bradford, 1978. "Tax Neutrality and the Investment Tax Credit," NBER Working Papers 0269, National Bureau of Economic Research, Inc.
  17. Darby, Michael R, 1975. "The Financial and Tax Effects of Monetary Policy on Interest Rates," Economic Inquiry, Western Economic Association International, vol. 13(2), pages 266-76, June.
  18. King, Mervyn A, 1974. "Taxation and the Cost of Capital," Review of Economic Studies, Wiley Blackwell, vol. 41(1), pages 21-35, January.
  19. Bhattacharya, Sudipto, 1980. "Nondissipative Signaling Structures and Dividend Policy," The Quarterly Journal of Economics, MIT Press, vol. 95(1), pages 1-24, August.
  20. Lewellen, Wilbur G, et al, 1978. "Some Direct Evidence on the Dividend Clientele Phenomenon," Journal of Finance, American Finance Association, vol. 33(5), pages 1385-99, December.
  21. Steinar Ekern & Robert Wilson, 1974. "On the Theory of the Firm in an Economy with Incomplete Markets," Bell Journal of Economics, The RAND Corporation, vol. 5(1), pages 171-180, Spring.
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