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Personal taxation of capital income and the financial leverage of firms

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  • Frank Fossen

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  • Martin Simmler

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Abstract

Tax competition for capital has led to a trend where many countries levy lower taxes on interest income, often introducing differential taxation between interest and business income. This study analyzes the effect on firm debt usage. We exploit Germany’s 2009 tax reform, which introduced a final withholding tax on interest income with a flat rate 18 percentage points below the unchanged tax rate on income from unincorporated businesses, as a quasi-experiment. The results, based on firm-level panel data, indicate that firms increase their leverage when the tax rate on interest income decreases, albeit to a small degree. Copyright Springer Science+Business Media New York 2016

Suggested Citation

  • Frank Fossen & Martin Simmler, 2016. "Personal taxation of capital income and the financial leverage of firms," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 23(1), pages 48-81, February.
  • Handle: RePEc:kap:itaxpf:v:23:y:2016:i:1:p:48-81
    DOI: 10.1007/s10797-015-9349-0
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    More about this item

    Keywords

    Income taxation; Capital taxation; Financial structure; Leverage; Matching; H25; H24; G32;

    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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