Profit Taxation and Finance Constraints

Keuschnigg, Christian; Ribi, Evelyn

doi:10.2139/ssrn.1545685

Cited by 6 publications

References 21 publications

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Firms' financial choices and thin capitalization rules under corporate tax competition

Haufler¹,

Runkel²

2012

European Economic Review

105

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Thin capitalization rules have become an important element in the corporate tax systems of developed countries. This paper sets up a model where national and multinational firms choose tax-efficient financial structures and countries compete for multinational firms through statutory tax rates and thin capitalization rules that limit the tax-deductibility of internal debt flows. In a symmetric tax competition equilibrium each country chooses inefficiently low tax rates and inefficiently lax thin capitalization rules. We show that a coordinated tightening of thin capitalization rules benefits both countries, even though it intensifies competition via tax rates. When countries differ in size, the smaller country not only chooses the lower tax rate but also the more lenient thin capitalization rule.

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Firms' financial choices and thin capitalization rules under corporate tax competition

Haufler¹,

Runkel²

2012

European Economic Review

105

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Investment incentives and corporate tax asymmetries

Edgerton

2010

Journal of Public Economics

172

120

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Business Taxation, Corporate Finance, and Economic Performance

Keuschnigg

Ribi

2012

Oxford Handbooks Online

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This survey of recent research in corporate finance discusses how business taxes, subsidies as well as a country's institutional development affect several important decision margins of heterogeneous firms. We argue that innovative firms, as a result of agency problems between insiders and outside investors, are most frequently finance constrained. We discuss how profit taxes reduce investment of constrained firms by their effect on cash-flow, and of unconstrained firms by their effect on the user cost of capital. Moreover, tax reform as well as tax financed R&D subsidies can enhance aggregate investment, innovation and efficiency by implicitly redistributing profits towards constrained firms where capital earns the highest return. We argue that the corporate legal form improves firms' access to external funds. We then explain the firms' choice between venture capital and bank financing and discuss how business taxation can affect venture capital financing on both the extensive and intensive margins. Finally, we review theory and evidence on how corporate finance may shape a country's comparative advantage in innovative industries as well as aggregate labor market performance when part of firms are finance constrained.

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Profit Taxation and Finance Constraints

Cited by 6 publications

References 21 publications

Firms' financial choices and thin capitalization rules under corporate tax competition

Firms' financial choices and thin capitalization rules under corporate tax competition

Investment incentives and corporate tax asymmetries

Business Taxation, Corporate Finance, and Economic Performance

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