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

Author

Listed:
  • Robin Boadway

    (Queen's University, ON, Canada)

  • Motohiro Sato

    (Hitotsubashi University, Japan)

  • Jean-François Tremblay

    (University of Ottawa, ON, Canada)

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 risk-neutral 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. In these circumstances, investment decisions are distorted, with investment being less than in the full-information case. Cash-flow taxation corrects the distortion by inducing more investment in rent-generating projects and increasing social welfare. An ACE tax is equivalent to a cash-flow tax but is easier to implement under asymmetric information.

Suggested Citation

  • Robin Boadway & Motohiro Sato & Jean-François Tremblay, 2017. "Cash-Flow Business Taxation Revisited: Bankruptcy, Risk Aversion and Asymmetric Information," Working Papers 1713E, University of Ottawa, Department of Economics.
    • Handle: RePEc:ott:wpaper:1713e
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    References listed on IDEAS

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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.

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    More about this item

    Keywords

    cash-flow tax; risk-averse firms; asymmetric information;
    All these keywords.

    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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