IDEAS home Printed from https://ideas.repec.org/a/eee/jbfina/v100y2019icp151-166.html
   My bibliography  Save this article

The debt tax shield in general equilibrium

Author

Listed:
  • Fischer, Marcel
  • Jensen, Bjarne Astrup

Abstract

We study the general-equilibrium effects of the corporate debt tax shield in an endowment economy with a redistributive tax system that taxes firm profits and household income and redistributes tax revenues in an attempt to harmonize households’ lifetime consumption opportunities. In general equilibrium, the debt tax shield not only affects corporate capital structure and valuation but also causes poorer households to consume more and save less at a younger age. Without the debt tax shield, the same welfare improvements for poorer households are achievable with significantly lower tax rates.

Suggested Citation

  • Fischer, Marcel & Jensen, Bjarne Astrup, 2019. "The debt tax shield in general equilibrium," Journal of Banking & Finance, Elsevier, vol. 100(C), pages 151-166.
    • Handle: RePEc:eee:jbfina:v:100:y:2019:i:c:p:151-166
    DOI: 10.1016/j.jbankfin.2018.12.014
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0378426618302826
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jbankfin.2018.12.014?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Hovakimian, Armen & Opler, Tim & Titman, Sheridan, 2001. "The Debt-Equity Choice," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 36(1), pages 1-24, March.
    2. Cooper, Ian A. & Nyborg, Kjell G., 2006. "The value of tax shields IS equal to the present value of tax shields," Journal of Financial Economics, Elsevier, vol. 81(1), pages 215-225, July.
    3. MacKie-Mason, Jeffrey K, 1990. "Do Taxes Affect Corporate Financing Decisions?," Journal of Finance, American Finance Association, vol. 45(5), pages 1471-1493, December.
    4. Ian A. Cooper & Kjell G. Nyborg, 2008. "Tax‐Adjusted Discount Rates with Investor Taxes and Risky Debt," Financial Management, Financial Management Association International, vol. 37(2), pages 365-379, June.
    5. Facundo Alvaredo & Anthony Atkinson & Thomas Piketty & Emmanuel Saez, 2013. "The Top 1% in International and Historical Perspective," Post-Print halshs-00847231, HAL.
    6. Heider, Florian & Ljungqvist, Alexander, 2015. "As certain as debt and taxes: Estimating the tax sensitivity of leverage from state tax changes," Journal of Financial Economics, Elsevier, vol. 118(3), pages 684-712.
    7. Leonie Bell & Tim Jenkinson, 2002. "New Evidence of the Impact of Dividend Taxation and on the Identity of the Marginal Investor," Journal of Finance, American Finance Association, vol. 57(3), pages 1321-1346, June.
    8. Givoly, Dan, et al, 1992. "Taxes and Capital Structure: Evidence from Firms' Response to the Tax Reform Act of 1986," The Review of Financial Studies, Society for Financial Studies, vol. 5(2), pages 331-355.
    9. Anthony B. Atkinson & Thomas Piketty & Emmanuel Saez, 2011. "Top Incomes in the Long Run of History," Journal of Economic Literature, American Economic Association, vol. 49(1), pages 3-71, March.
    10. Barro, Robert J, 1974. "Are Government Bonds Net Wealth?," Journal of Political Economy, University of Chicago Press, vol. 82(6), pages 1095-1117, Nov.-Dec..
    11. Schepens, Glenn, 2016. "Taxes and bank capital structure," Journal of Financial Economics, Elsevier, vol. 120(3), pages 585-600.
    12. Halling, Michael & Yu, Jin & Zechner, Josef, 2016. "Leverage dynamics over the business cycle," Journal of Financial Economics, Elsevier, vol. 122(1), pages 21-41.
    13. Pástor, Lˇuboš & Veronesi, Pietro, 2016. "Income inequality and asset prices under redistributive taxation," Journal of Monetary Economics, Elsevier, vol. 81(C), pages 1-20.
    14. Graham, John R. & Leary, Mark T. & Roberts, Michael R., 2015. "A century of capital structure: The leveraging of corporate America," Journal of Financial Economics, Elsevier, vol. 118(3), pages 658-683.
    15. Ľuboš Pástor & Pietro Veronesi, 2020. "Political Cycles and Stock Returns," Journal of Political Economy, University of Chicago Press, vol. 128(11), pages 4011-4045.
    16. Faccio, Mara & Xu, Jin, 2015. "Taxes and Capital Structure," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 50(3), pages 277-300, June.
    17. Alberto Alesina & George-Marios Angeletos, 2005. "Fairness and Redistribution," American Economic Review, American Economic Association, vol. 95(4), pages 960-980, September.
    18. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-1445, November.
    19. Charles Grant & Christos Koulovatianos & Alexander Michaelides & Mario Padula, 2010. "Evidence on the Insurance Effect of Redistributive Taxation," The Review of Economics and Statistics, MIT Press, vol. 92(4), pages 965-973, November.
    20. Graham, John R., 1999. "Do personal taxes affect corporate financing decisions?," Journal of Public Economics, Elsevier, vol. 73(2), pages 147-185, August.
    21. Faulkender, Michael & Smith, Jason M., 2016. "Taxes and leverage at multinational corporations," Journal of Financial Economics, Elsevier, vol. 122(1), pages 1-20.
    22. John R. Graham, 2000. "How Big Are the Tax Benefits of Debt?," Journal of Finance, American Finance Association, vol. 55(5), pages 1901-1941, October.
    23. Thomas Piketty & Emmanuel Saez, 2003. "Income Inequality in the United States, 1913–1998," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 118(1), pages 1-41.
    24. Eugene F. Fama, 2011. "My Life in Finance," Annual Review of Financial Economics, Annual Reviews, vol. 3(1), pages 1-15, December.
    25. 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.
    26. repec:hal:pseose:halshs-00847231 is not listed on IDEAS
    27. Facundo Alvaredo & Anthony B. Atkinson & Thomas Piketty & Emmanuel Saez, 2013. "The Top 1 Percent in International and Historical Perspective," Journal of Economic Perspectives, American Economic Association, vol. 27(3), pages 3-20, Summer.
    28. George M. Constantinides & Anisha Ghosh, 2011. "Asset Pricing Tests with Long-run Risks in Consumption Growth," The Review of Asset Pricing Studies, Society for Financial Studies, vol. 1(1), pages 96-136.
    29. Brennan, M. J. & Kraus, Alan, 1978. "Necessary Conditions for Aggregation in Securities Markets," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 13(3), pages 407-418, September.
    30. Miller, Merton H, 1977. "Debt and Taxes," Journal of Finance, American Finance Association, vol. 32(2), pages 261-275, May.
    31. Rubinstein, Mark, 1974. "An aggregation theorem for securities markets," Journal of Financial Economics, Elsevier, vol. 1(3), pages 225-244, September.
    32. Romer, Thomas, 1975. "Individual welfare, majority voting, and the properties of a linear income tax," Journal of Public Economics, Elsevier, vol. 4(2), pages 163-185, February.
    33. Meltzer, Allan H & Richard, Scott F, 1981. "A Rational Theory of the Size of Government," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 914-927, October.
    34. Becker, Bo & Jacob, Marcus & Jacob, Martin, 2013. "Payout taxes and the allocation of investment," Journal of Financial Economics, Elsevier, vol. 107(1), pages 1-24.
    35. Graham, John R. & Tucker, Alan L., 2006. "Tax shelters and corporate debt policy," Journal of Financial Economics, Elsevier, vol. 81(3), pages 563-594, September.
    36. Serena Fatica & Thomas Hemmelgarn & Gaëtan Nicodème, 2013. "The Debt-Equity Tax Bias: Consequences and Solutions," Reflets et perspectives de la vie économique, De Boeck Université, vol. 0(1), pages 5-18.
    37. Myron J. Gordon & Eli Shapiro, 1956. "Capital Equipment Analysis: The Required Rate of Profit," Management Science, INFORMS, vol. 3(1), pages 102-110, October.
    38. Deen Kemsley & Doron Nissim, 2002. "Valuation of the Debt Tax Shield," Journal of Finance, American Finance Association, vol. 57(5), pages 2045-2073, October.
    39. Sialm, Clemens, 2006. "Stochastic taxation and asset pricing in dynamic general equilibrium," Journal of Economic Dynamics and Control, Elsevier, vol. 30(3), pages 511-540, March.
    40. Michael P. Devereux & Giorgia Maffini & Jing Xing, 2015. "Corporate Tax Incentives and Capital Structure: Empirical Evidence from UK Tax Returns," Working Papers 076, "Carlo F. Dondena" Centre for Research on Social Dynamics (DONDENA), Università Commerciale Luigi Bocconi.
    41. Ruud Mooij & Michael Devereux, 2011. "An applied analysis of ACE and CBIT reforms in the EU," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 18(1), pages 93-120, February.
    42. JULES H. Van BINSBERGEN & JOHN R. GRAHAM & JIE YANG, 2010. "The Cost of Debt," Journal of Finance, American Finance Association, vol. 65(6), pages 2089-2136, December.
    43. Mark Rubinstein, 1976. "The Valuation of Uncertain Income Streams and the Pricing of Options," Bell Journal of Economics, The RAND Corporation, vol. 7(2), pages 407-425, Autumn.
    44. Miles, James A. & Ezzell, John R., 1980. "The Weighted Average Cost of Capital, Perfect Capital Markets, and Project Life: A Clarification," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 15(3), pages 719-730, September.
    45. Marcel Fischer & Bjarne Astrup Jensen, 2015. "Taxation, Transfer Income and Stock Market Participation," Review of Finance, European Finance Association, vol. 19(2), pages 823-863.
    46. Craig Doidge & Alexander Dyck, 2015. "Taxes and Corporate Policies: Evidence from a Quasi Natural Experiment," Journal of Finance, American Finance Association, vol. 70(1), pages 45-89, February.
    47. Fan, Joseph P. H. & Titman, Sheridan & Twite, Garry, 2012. "An International Comparison of Capital Structure and Debt Maturity Choices," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 47(1), pages 23-56, February.
    48. Korajczyk, Robert A. & Levy, Amnon, 2003. "Capital structure choice: macroeconomic conditions and financial constraints," Journal of Financial Economics, Elsevier, vol. 68(1), pages 75-109, April.
    49. Spengel, Christoph & Heckemeyer, Jost Henrich & Bräutigam, Rainer & Nicolay, Katharina & Klar, Oliver & Stutzenberger, Kathrin, 2016. "The effects of tax reforms to address the debt-equity bias on the cost of capital and on effective tax rates," ZEW Expertises, ZEW - Leibniz Centre for European Economic Research, volume 65, number 148156, June.
    50. HARRY DeANGELO & RICHARD ROLL, 2015. "How Stable Are Corporate Capital Structures?," Journal of Finance, American Finance Association, vol. 70(1), pages 373-418, February.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Fischer, Marcel & Jensen, Bjarne Astrup, 2024. "The tax shield increases the interest rate," Journal of Banking & Finance, Elsevier, vol. 161(C).
    2. Philipp J. H. Schröder & Allan Sørensen, 2023. "Corporate taxation when firms are heterogeneous: ACE versus CBIT," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 30(2), pages 396-418, April.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Fischer, Marcel & Jensen, Bjarne Astrup, 2017. "The debt tax shield, economic growth and inequality," arqus Discussion Papers in Quantitative Tax Research 219, arqus - Arbeitskreis Quantitative Steuerlehre.
    2. Fischer, Marcel & Jensen, Bjarne Astrup, 2024. "The tax shield increases the interest rate," Journal of Banking & Finance, Elsevier, vol. 161(C).
    3. Mai, Nhat Chi, 2012. "Market timing, taxes and capital structure: evidence from Vietnam," OSF Preprints t3mvs, Center for Open Science.
    4. Michael Overesch & Dennis Voeller, 2010. "The Impact of Personal and Corporate Taxation on Capital Structure Choices," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 66(3), pages 263-294, September.
    5. Peter Vaz da Fonseca & Michele Nascimento Juca & Wilson Toshiro Nakamura, 2020. "Debt Tax Benefits in a High Tax Emerging Market: Evidence from Brazil," International Journal of Economics & Business Administration (IJEBA), International Journal of Economics & Business Administration (IJEBA), vol. 0(2), pages 35-52.
    6. Yue Cheng & Christopher J. Green, 2008. "Taxes And Capital Structure: A Study Of European Companies," Manchester School, University of Manchester, vol. 76(s1), pages 85-115, September.
    7. Hebous, Shafik & Ruf, Martin, 2017. "Evaluating the effects of ACE systems on multinational debt financing and investment," Journal of Public Economics, Elsevier, vol. 156(C), pages 131-149.
    8. Deng, Kebin & Zhu, Yushu & Smith, Tom & McCrystal, Alan, 2020. "Tax and leverage: Evidence from China," China Economic Review, Elsevier, vol. 62(C).
    9. European Commission, 2013. "Tax reforms in EU Member States - Tax policy challenges for economic growth and fiscal sustainability – 2013 Report," Taxation Papers 38, Directorate General Taxation and Customs Union, European Commission.
    10. David Yechiam Aharon & Yossi Yagil, 2019. "The Impact of Financial Leverage on Shareholders’ Systematic Risk," Sustainability, MDPI, vol. 11(23), pages 1-23, November.
    11. Demirci, Irem & Huang, Jennifer & Sialm, Clemens, 2019. "Government debt and corporate leverage: International evidence," Journal of Financial Economics, Elsevier, vol. 133(2), pages 337-356.
    12. He, Wen & Hu, Maggie Rong & Mi, Lin & Yu, Jin, 2021. "How stable are corporate capital structures? International evidence," Journal of Banking & Finance, Elsevier, vol. 126(C).
    13. Andreoli, Francesco & Olivera, Javier, 2020. "Preferences for redistribution and exposure to tax-benefit schemes in Europe," European Journal of Political Economy, Elsevier, vol. 63(C).
    14. Lucia MICHALKOVA & Tomas KLIESTIK, 2019. "The Role Of Risk In The Valuation Of Tax Shield," Proceedings of the INTERNATIONAL MANAGEMENT CONFERENCE, Faculty of Management, Academy of Economic Studies, Bucharest, Romania, vol. 13(1), pages 218-233, November.
    15. Nadja Dwenger & Viktor Steiner, 2014. "Financial leverage and corporate taxation: evidence from German corporate tax return data," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 21(1), pages 1-28, February.
    16. Heider, Florian & Ljungqvist, Alexander, 2015. "As certain as debt and taxes: Estimating the tax sensitivity of leverage from state tax changes," Journal of Financial Economics, Elsevier, vol. 118(3), pages 684-712.
    17. Voeller, Dennis & Overesch, Michael, 2008. "The Impact of Personal and Corporate Taxation on Capital Structure Choices," ZEW Discussion Papers 08-020, ZEW - Leibniz Centre for European Economic Research.
    18. Jin, Xiaoye, 2021. "Corporate tax aggressiveness and capital structure decisions: Evidence from China," International Review of Economics & Finance, Elsevier, vol. 75(C), pages 94-111.
    19. Colombo, Jéfferson A. & Caldeira, João F., 2018. "The role of taxes and the interdependence among corporate financial policies: Evidence from a natural experiment," Journal of Corporate Finance, Elsevier, vol. 50(C), pages 402-423.
    20. Peter Vaz da Fonseca & Andrea Decourt Savelli & Michele Nascimento Juca, 2020. "A Systematic Review of the Influence of Taxation on Corporate Capital Structure," International Journal of Economics & Business Administration (IJEBA), International Journal of Economics & Business Administration (IJEBA), vol. 0(2), pages 155-178.

    More about this item

    Keywords

    Debt tax shield; Corporate leverage; General equilibrium; Endowment economy; Redistributive taxation;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jbfina:v:100:y:2019:i:c:p:151-166. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/jbf .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.