Taxes Depress Corporate Borrowing: Evidence from Private Firms / Ivan T. Ivanov, Luke Pettit, Toni Whited.

Format:

Book

Author/Creator:

Ivanov, Ivan T.

Contributor:

National Bureau of Economic Research.

Pettit, Luke.

Whited, Toni.

Series:

Working Paper Series (National Bureau of Economic Research) no. w32398.

NBER working paper series no. w32398

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2024.

Summary:

We use variation in state corporate income tax rates to re-examine the relation between taxes and corporate leverage. Contrary to prior research, we find that corporate leverage rises after tax cuts for small private firms. An estimated dynamic equilibrium model shows that tax cuts make capital more productive and spur borrowing. Tax cuts also produce more distant default thresholds and lower credit spreads. These effects outweigh the lower interest tax deduction and lead to higher optimal leverage choices, especially for firms with flexible investment policies. The presence of the interest tax deduction raises consumer welfare in equilibrium.

Notes:

Print version record

May 2024.