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Taxation And Finance Constrained Firms

Author

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  • Iris Claus

Abstract

This paper develops an open economy model to assess the long-run effects of taxation when firms are finance constrained. Finance constraints arise because of imperfect information between borrowers and lenders. Only borrowers (firms) can costlessly observe actual returns from production. Imperfect information and finance constraints magnify the effects of taxation. A reduction (rise) in income taxation increases (lowers) firms’ internal funds and their ability to access external finance to expand production. The findings thus underline the importance of incorporating access to finance into models that assess the impact of taxation.

Suggested Citation

  • Iris Claus, 2006. "Taxation And Finance Constrained Firms," CAMA Working Papers 2006-20, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  • Handle: RePEc:een:camaaa:2006-20
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    File URL: https://cama.crawford.anu.edu.au/sites/default/files/publication/cama_crawford_anu_edu_au/2017-02/20_claus_2006.pdf
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    References listed on IDEAS

    as
    1. McCallum, Bennett T. & Nelson, Edward, 1999. "Nominal income targeting in an open-economy optimizing model," Journal of Monetary Economics, Elsevier, vol. 43(3), pages 553-578, June.
    2. McCallum, Bennett T & Nelson, Edward, 2000. "Monetary Policy for an Open Economy: An Alternative Framework with Optimizing Agents and Sticky Prices," Oxford Review of Economic Policy, Oxford University Press, vol. 16(4), pages 74-91, Winter.
    3. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June.
    4. Julia Hall & Grant Scobie, 2005. "Capital Shallowness: A Problem for New Zealand?," Treasury Working Paper Series 05/05, New Zealand Treasury.
    5. William M. Gentry & R. Glenn Hubbard, 2005. ""Success Taxes," Entrepreneurial Entry, and Innovation," NBER Chapters,in: Innovation Policy and the Economy, Volume 5, pages 87-108 National Bureau of Economic Research, Inc.
    6. Robert Carroll & Douglas Holtz-Eakin & Mark Rider & Harvey S. Rosen, 2001. "Personal Income Taxes and the Growth of Small Firms," NBER Chapters,in: Tax Policy and the Economy, Volume 15, pages 121-148 National Bureau of Economic Research, Inc.
    7. Timothy S. Fuerst & Charles T. Carlstrom, 1998. "Agency costs and business cycles," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 12(3), pages 583-597.
    Full references (including those not matched with items on IDEAS)

    More about this item

    JEL classification:

    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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