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The Credit Channel of Tax Policy

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  • Strulik, Holger

Abstract

A neoclassical growth model is augmented by a corporate sector, financial intermediation, and a set of tax rates. In this setting, capital structure is determined by the interplay between an advantage of debt finance resulting from the tax system and a disadvantage resulting from asymmetric information and the entailed agency costs. Effects of capital tax reforms are investigated with a special focus on the credit channel that operates through the finance decision of firms. The theoretical part of the article derives which financial and real effects of private and corporate income tax policies can be expected. Using a calibration with U.S.\ data, the applied part demonstrates that tax cuts cause significant adjustments of capital structure. Nevertheless, the credit channel creates relatively small effects of tax reforms on consumption, investment, and growth.

Suggested Citation

  • Strulik, Holger, 2007. "The Credit Channel of Tax Policy," Hannover Economic Papers (HEP) dp-368, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
    • Handle: RePEc:han:dpaper:dp-368
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    References listed on IDEAS

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    JEL classification:

    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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