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Cash-flow business taxation revisited: bankruptcy, risk aversion and asymmetric information

Author

Listed:
  • Robin Boadway

    (Queen¡¯s University)

  • Motohiro Sato

    (Hitotsubashi University)

  • Jean-Francois Tremblay

    (University of Ottawa)

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. 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. The ACE tax distorts firms¡¯ decisions when bankruptcy risk exists. We characterize the nature of such distortions and consider how cash-flow taxes would have to be amended to achieve neutrality.

Suggested Citation

  • Robin Boadway & Motohiro Sato & Jean-Francois Tremblay, 2015. "Cash-flow business taxation revisited: bankruptcy, risk aversion and asymmetric information," Working Papers 1531, Oxford University Centre for Business Taxation.
    • Handle: RePEc:btx:wpaper:1531
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    File URL: http://www.sbs.ox.ac.uk/sites/default/files/Business_Taxation/Docs/Publications/Working_Papers/series-15/WP1531.pdf
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    Cited by:

    1. Robin W. Boadway & Jean-François Tremblay, 2016. "Modernizing Business Taxation," C.D. Howe Institute Commentary, C.D. Howe Institute, issue 452, May.
    2. 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.
    3. 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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