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Taxation and the Cost of Capital: The "Old" View, the "New" View, and Another View

In: Tax Policy and the Economy, Volume 5

  • Hans-Werner Sinn

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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This chapter was published in:
  • David Bradford, 1991. "Tax Policy and the Economy, Volume 5," NBER Books, National Bureau of Economic Research, Inc, number brad91-1, September.
  • This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 11268.
    Handle: RePEc:nbr:nberch:11268
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    1. James M. Poterba, 1987. "Tax Policy and Corporate Saving," Working papers 470, Massachusetts Institute of Technology (MIT), Department of Economics.
    2. David F. Bradford, 1979. "The Incidence and Allocation Effects of a Tax on Corporate Distributions," NBER Working Papers 0349, National Bureau of Economic Research, Inc.
    3. Arnold C. Harberger, 1962. "The Incidence of the Corporation Income Tax," Journal of Political Economy, University of Chicago Press, vol. 70, pages 215.
    4. J. S. S. Edwards & M. J. Keen, 1984. "Wealth Maximization and the Cost of Capital: A Comment," The Quarterly Journal of Economics, Oxford University Press, vol. 99(1), pages 211-214.
    5. Alan J. Auerbach, 1988. "Corporate Takeovers: Causes and Consequences," NBER Books, National Bureau of Economic Research, Inc, number auer88-1, September.
    6. Goulder, Lawrence H. & Summers, Lawrence H., 1989. "Tax policy, asset prices, and growth : A general equilibrium analysis," Journal of Public Economics, Elsevier, vol. 38(3), pages 265-296, April.
    7. Don Fullerton & James B. Mackie, 1988. "Economic Efficiency in Recent Tax Reform History: Policy Reversals or Consistent Improvements?," NBER Working Papers 2593, National Bureau of Economic Research, Inc.
    8. Koichi Hamada, 1966. "Strategic Aspects of Taxation on Foreign Investment Income," The Quarterly Journal of Economics, Oxford University Press, vol. 80(3), pages 361-375.
    9. Mervyn A. King, 1974. "Taxation and the Cost of Capital," Review of Economic Studies, Oxford University Press, vol. 41(1), pages 21-35.
    10. Alan J. Auerbach, 1980. "Wealth Maximization and the Cost of Capital," NBER Working Papers 0254, National Bureau of Economic Research, Inc.
    11. Alan J. Auerbach, 1982. "Taxation, Corporate Financial Policy and the Cost of Capital," NBER Working Papers 1026, National Bureau of Economic Research, Inc.
    12. Stiglitz, Joseph E., 1973. "Taxation, corporate financial policy, and the cost of capital," Journal of Public Economics, Elsevier, vol. 2(1), pages 1-34, February.
    13. Alan J. Auerbach, 1988. "Introduction to "Corporate Takeovers: Causes and Consequences"," NBER Chapters, in: Corporate Takeovers: Causes and Consequences, pages 1-8 National Bureau of Economic Research, Inc.
    14. 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.
    15. Murray C. Kemp, 1962. "Foreign Investment And The National Advantage," The Economic Record, The Economic Society of Australia, vol. 38(81), pages 56-62, 03.
    16. Mark L. Gertler & R. Glenn Hubbard, 1989. "Taxation, Corporate Capital Structure, and Financial Distress," NBER Working Papers 3202, National Bureau of Economic Research, Inc.
    17. Joosung Jun, 1989. "Tax Policy and International Direct Investment," NBER Working Papers 3048, National Bureau of Economic Research, Inc.
    18. James M. Poterba & Lawrence H. Summers, 1984. "The Economic Effects of Dividend Taxation," NBER Working Papers 1353, National Bureau of Economic Research, Inc.
    19. Howitt, Peter & Sinn, Hans-Werner, 1989. "Gradual Reforms of Capital Income Taxation," Munich Reprints in Economics 19370, University of Munich, Department of Economics.
    20. Bagwell, Laurie Simon & Shoven, John B, 1989. "Cash Distributions to Shareholders," Journal of Economic Perspectives, American Economic Association, vol. 3(3), pages 129-40, Summer.
    21. 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, vol. 36(73), pages 13-35, 03.
    22. Miller, Merton H, 1977. "Debt and Taxes," Journal of Finance, American Finance Association, vol. 32(2), pages 261-75, May.
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