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Taxation and Corporate Use of Debt: Implications for Tax Policy

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  • Gordon, Roger H.

Abstract

There is growing empirical evidence showing that taxes encourage use of debt in large profitable firms and discourage it in less profitable firms. There has been debate, though, on the source of any non-tax costs from debt finance offsetting the tax advantages of debt. This paper lays out competing hypotheses, notes that the existing empirical evidence is more supportive of a “lemons” model in which lack of information about the viability of borrowing firms inhibits use of debt, and then explores how tax policy should be designed in response.

Suggested Citation

  • Gordon, Roger H., 2010. "Taxation and Corporate Use of Debt: Implications for Tax Policy," National Tax Journal, National Tax Association;National Tax Journal, vol. 63(1), pages 151-174, March.
  • Handle: RePEc:ntj:journl:v:63:y:2010:i:1:p:151-74
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    Citations

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    Cited by:

    1. Stefan Lutz, 2012. "Effects of taxation on European multi-nationals’ financing and profits," The School of Economics Discussion Paper Series 1214, Economics, The University of Manchester.
    2. Clemens Fuest & Li Liu, 2015. "Does ownership affect the impact of taxes on firm behaviour? Evidence from China," Working Papers 1505, Oxford University Centre for Business Taxation.
    3. Scheuer, Florian, 2013. "Adverse selection in credit markets and regressive profit taxation," Journal of Economic Theory, Elsevier, vol. 148(4), pages 1333-1360.
    4. Fossen, Frank M. & Simmler, Martin, 2016. "Personal Taxation of Capital Income and the Financial Leverage of Firms," EconStor Open Access Articles, ZBW - Leibniz Information Centre for Economics, pages 48-81.
    5. repec:kap:itaxpf:v:24:y:2017:i:6:d:10.1007_s10797-017-9441-8 is not listed on IDEAS
    6. Ruud A. De Mooij & Michael Keen, 2016. "Debt, Taxes, and Banks," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 48(1), pages 5-33, February.
    7. Florian Chatagny & Marko Koethenbuerger & Michael Stimmelmayr, 2017. "Introducing an IP license box in Switzerland: quantifying the effects," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 24(6), pages 927-961, December.
    8. Ruud A. de Mooij & Michael Keen & Masanori Orihara, 2013. "Taxation, Bank Leverage, and Financial Crises," IMF Working Papers 13/48, International Monetary Fund.
    9. R. Miniaci & M. Parisi & P. Panteghini, 2014. "Debt shifting in Europe," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 21(3), pages 397-435, June.
    10. Mihir A. Desai & Dhammika Dharmapala, 2015. "Interest Deductions in a Multijurisdictional World," National Tax Journal, National Tax Association;National Tax Journal, vol. 68(3), pages 653-680, September.
    11. Francesco Cohen & Alessandro Fedele & Paolo M. Panteghini, 2016. "Corporate taxation and financial strategies under asymmetric information," Economia Politica: Journal of Analytical and Institutional Economics, Springer;Fondazione Edison, vol. 33(1), pages 9-34, April.
    12. repec:eee:jbfina:v:96:y:2018:i:c:p:368-378 is not listed on IDEAS
    13. Feld, Lars P. & Heckemeyer, Jost H. & Overesch, Michael, 2013. "Capital structure choice and company taxation: A meta-study," Journal of Banking & Finance, Elsevier, vol. 37(8), pages 2850-2866.
    14. Nils aus dem Moore, 2014. "Taxes and Corporate Financing Decisions – Evidence from the Belgian ACE Reform," Ruhr Economic Papers 0533, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.
    15. Nicolay, Katharina & Nusser, Hannah & Pfeiffer, Olena, 2017. "On the interdependency of profit shifting channels and the effectiveness of anti-avoidance legislation," ZEW Discussion Papers 17-066, ZEW - Leibniz-Zentrum für Europäische Wirtschaftsforschung GmbH Mannheim / Leibniz Centre for European Economic Research.
    16. repec:kap:itaxpf:v:24:y:2017:i:5:d:10.1007_s10797-016-9432-1 is not listed on IDEAS
    17. Dhammika Dharmapala, 2016. "The economics of corporate and business tax reform," Working Papers 1604, Oxford University Centre for Business Taxation.
    18. De Mooij, Ruud & Hebous, Shafik, 2018. "Curbing corporate debt bias: Do limitations to interest deductibility work?," Journal of Banking & Finance, Elsevier, vol. 96(C), pages 368-378.
    19. Holzmann, Carolin Maria, 2016. "Transfer pricing as tax avoidance under different legislative schemes," Annual Conference 2016 (Augsburg): Demographic Change 145929, Verein für Socialpolitik / German Economic Association.
    20. Peter Birch Sørensen, 2014. "Taxation and the Optimal Constraint on Corporate Debt Finance," CESifo Working Paper Series 5101, CESifo Group Munich.
    21. Peter Birch Sørensen, 2014. "Taxation and the optimal constraint on corporate debt finance," Working Papers 1427, Oxford University Centre for Business Taxation.
    22. repec:eco:journ1:2017-02-10 is not listed on IDEAS
    23. repec:zbw:rwirep:0533 is not listed on IDEAS
    24. 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.

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