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Financial leverage and corporate taxation: Evidence from German corporate tax return data

Listed author(s):
  • Dwenger, Nadja
  • Steiner, Viktor

We estimate the impact of effective profit taxation on the financial leverage of corporations on the basis of a pseudo-panel constructed from corporate tax return micro data for the period 1998-2001, a period which saw the introduction of a major corporate tax reform in Germany. The financial leverage is measured by the ratio of long-term debt to total capital. Endogeneity of the effective corporate tax rate is controlled for by an instrumental variable approach. Our instrument for the observed effective tax rate is the counterfactual tax rate a corporation would face in a particular period had there been no endogenous change of its financial structure. This counterfactual is obtained from a detailed microsimulation model of the corporate sector based on tax return micro data. We find a statistically significant and relatively large positive effect of the tax rate on corporate leverage: on average, an increase of the tax rate by 10 percent would increase the financial leverage by about 5 percent. We also find that the debt ratio is less responsive for small corporations and for corporations that benefit from various other forms of tax shields, in particular depreciation allowances and tax loss carry-forward. However, tax effects do not seem to depend on risk, although the level of economic risk does affect corporate leverage.

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File URL: https://www.econstor.eu/bitstream/10419/30840/1/608204382.pdf
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Paper provided by arqus - Arbeitskreis Quantitative Steuerlehre in its series arqus Discussion Papers in Quantitative Tax Research with number 61.

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Date of creation: 2009
Handle: RePEc:zbw:arqudp:61
Contact details of provider: Web page: http://www.arqus.info/

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  13. Stefan Bach & Hermann Buslei & Nadja Dwenger & Frank Fossen, 2008. "Dokumentation des Mikrosimulationsmodells BizTax zur Unternehmensbesteuerung in Deutschland," Data Documentation 29, DIW Berlin, German Institute for Economic Research.
  14. Reint Gropp, 2002. "Local Taxes and Capital Structure Choice," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 9(1), pages 51-71, January.
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  16. Frank Blasch & Alfons Weichenrieder, 2006. "When Taxation Changes the Course of the Year – Fiscal Year Adjustments and the German Tax Reform 2000/2001," CESifo Working Paper Series 1861, CESifo Group Munich.
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