Profit taxes and financing constraints

Abstract

Without financing frictions, profit taxes reduce investment by their effect on the user cost of capital. With financing constraints, investment becomes sensitive to cash-flow. In this situation, even small taxes impose first order welfare losses, and ACE and cash-flow tax systems are no longer neutral. When banks become active and provide monitoring services in addition to finance, an ACE tax yields larger investment and welfare than an equal yield cash-flow tax.JEL-Classification: G38, H25. . We are particularly grateful for detailed suggestions and constructive comments by two anonymous referees and the editor, Eckhard Janeba.

Hosting Multinationals: Economic and Fiscal Implications

“…See Keuschnigg and Ribi (2013) and Koethenbuerger and Stimmelmayr (2014) on the role of financial constraints and corporate governance issues in this context.…”

Corporate deductibility provisions and managerial incentives

“…The finding relies on inefficiencies associated with decentralized tax choices rather than on corporate agency problems. Keuschnigg and Ribi (2013) show that for cash-constrained firms a cash-flow tax and an ACE tax system are not investment neutral and that bank monitoring influences the welfare effects of corporate taxation. Internal agency conflicts are absent.…”

“…33 With local stability of the Nash equilibrium, the sign of the change in α * * in response to a hike in z follows from ∂α * (m, z)/∂z and the sign of the change in m * * from dm * (α)/dα, implying that the change ∂α * (m, z)/∂m does not influence the qualitative changes in α * * and m * * . 34 Intuitively, a rise in z has a direct effect on α which changes the monitoring intensity as implied by the slope of the bank's best response. Due to the local stability of the Nash equilibrium, any subsequent repercussions will not overturn the first-round adjustments in the level of monitoring and in the sharing rule.…”

“…In order to perform meaningful comparative static analysis, we assume uniqueness of the Nash equilibrium. 34 Local stability requires |∂α * (m * * , z)/∂m| |dm * (α * * )/dα| < 1 which in general holds by an appropriate scaling of the cost of monitoring c(m, α), for instance. Lemma 3: (i) A rise in the deductibility rate increases (decreases) the equilibrium value α * * provided the shareholders' best response slopes upward (downward), i.e.…”

How Do Taxes Affect Investment When Firms Face Financial Constraints?

“…Fazzari et al (1988) and Bond and Meghir (1994b) were the first to discuss the effect of corporate taxation to investment under financial constraints. Keuschnigg and Ribi (2009) summarized these considerations in a theoretical model, which includes taxation in a principal agent setting with an investor and a bank.…”