Taxation and Corporation Finance / Roger H. Gordon, Burton G. Malkiel.

By:

Gordon, Roger H

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Material type: Text

TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w0576.Publication details: Cambridge, Mass. National Bureau of Economic Research 1980.Description: 1 online resource: illustrations (black and white)Subject(s):

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Abstract: This paper analyzes the effects of the federal tax structure on corporate financial and investment behavior. We first develop a model of corporate behavior given taxes, taking into account both uncertainty and costs of bankruptcy. Simpler models abstracting from bankruptcy costs had clear counterfactual implications. The forecasts from our model proved to be consistent with both the observed cross-sectional variation in debt-equity ratios and the time series pattern of debt-equity ratios (data that were constructed in the paper). We then attempted to measure the efficiency costs created by corporate tax distortions as implied by the model. The forecasted efficiency cost of the distortion favoring debt finance seemed to be quite large, while the tax distortion affecting investment seemed to be less important than others have claimed. The paper concludes with a study of the efficiency implications of various proposed corporate tax changes.

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Working Paper	Biblioteca Digital	Colección NBER	nber w0576 (Browse shelf(Opens below))	Not For Loan

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Previous	nber w0573 Consistent Simple Sum Aggregation over Assets /	nber w0574 Symmetric Substitution Matrices in Asset Demand Systsems /	nber w0575 Monetary and Fiscal Policies in an Open Economy /	nber w0576 Taxation and Corporation Finance /	nber w0577 Inflation, Tax Rules, and Investment: Some Econometric Evidence /	nber w0578 The Reservation Wage of Unemployed Persons in the Federal Republic of Germany: Theory and Empirical Tests /	nber w0579 Social Security, Induced Retirement, and Aggregate Capital Accumulation: A Correction and Updating /	Next

November 1980.

This paper analyzes the effects of the federal tax structure on corporate financial and investment behavior. We first develop a model of corporate behavior given taxes, taking into account both uncertainty and costs of bankruptcy. Simpler models abstracting from bankruptcy costs had clear counterfactual implications. The forecasts from our model proved to be consistent with both the observed cross-sectional variation in debt-equity ratios and the time series pattern of debt-equity ratios (data that were constructed in the paper). We then attempted to measure the efficiency costs created by corporate tax distortions as implied by the model. The forecasted efficiency cost of the distortion favoring debt finance seemed to be quite large, while the tax distortion affecting investment seemed to be less important than others have claimed. The paper concludes with a study of the efficiency implications of various proposed corporate tax changes.