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Taxation and Finance Constrained Firms

Author

Listed:
  • 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
    as

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    File URL: https://crawford.anu.edu.au/sites/default/files/2026-06/20_Claus_2006.pdf
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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    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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