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Cash-Flow Business Taxation Revisited: Bankruptcy, Risk Aversion and Asymmetric Information

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  • Boadway, Robin
  • Sato, Motohiro
  • Tremblay, Jean-FranÃgois

Abstract

It is well-known that cash-flow business taxes with full loss-offset, and their present-value equivalents, are neutral with respect to firms’ investment decisions when firms are riskneutral and there are no distortions. We study the effects of cash-flow business taxation when there is bankruptcy risk, when firms are risk-averse, and when financial intermediaries face asymmetric information problems in financing heterogeneous firms. Cash-flow taxes remain neutral under bankruptcy risk alone, but can distort the entry and investment decisions of firms under both risk-aversion and asymmetric information. We characterize the nature of such distortions and show that cash-flow taxes can increase social welfare in this context. An ACE tax is equivalent to a cash-flow tax but is easier to implement under asymmetric information.

Suggested Citation

  • Boadway, Robin & Sato, Motohiro & Tremblay, Jean-FranÃgois, 2016. "Cash-Flow Business Taxation Revisited: Bankruptcy, Risk Aversion and Asymmetric Information," Queen's Economics Department Working Papers 274698, Queen's University - Department of Economics.
    • Handle: RePEc:ags:quedwp:274698
    DOI: 10.22004/ag.econ.274698
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    Cited by:

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    2. Robin W. Boadway & Jean-François Tremblay, 2016. "Modernizing Business Taxation," C.D. Howe Institute Commentary, C.D. Howe Institute, issue 452, May.
    3. Robin Boadway & Motohiro Sato & Jean-François Tremblay, 2022. "Cash-flow business taxation revisited: bankruptcy and asymmetric information," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 29(4), pages 922-952, August.
    4. Robin Boadway & Motohiro Sato & Jean‐François Tremblay, 2021. "VAT and the taxation of rents," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 23(4), pages 601-621, August.

    More about this item

    Keywords

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    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies

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