Differential taxation and firms' financial leverage: Evidence from the introduction of a flat tax on interest income

Frank Fossen and Martin Simmler

No 2012/4, Discussion Papers from Free University Berlin, School of Business & Economics

Abstract: Tax competition for the mobile factor capital has led to a trend in many countries to levy lower taxes on interest income, often introducing differential taxation between interest and business income. In this study, we analyze the effect of such differential taxation on the debt ratio of firms. We exploit a 2009 tax reform in Germany as a quasi-experiment, which introduced a flat final withholding tax and opened a gap of 18 percentage points between the tax rate on income from unincorporated businesses and the new lower tax rate on interest income. We apply a regression adjusted semi-parametric difference-in-difference matching strategy based on firm level panel data. In addition, we implement a more structural approach with a tax rate differential, taking into account its endogeneity by using instrumental variables. The results indicate that firms increase their leverage when the tax rate on interest income decreases, albeit to a small degree.

Keywords: income taxation; capital taxation; financial structure; leverage; matching (search for similar items in EconPapers)
JEL-codes: G32 H24 H25 (search for similar items in EconPapers)
Date: 2012
New Economics Papers: this item is included in nep-acc, nep-pbe and nep-pub
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Related works:
Working Paper: Differential Taxation and Firms' Financial Leverage: Evidence from the Introduction of a Flat Tax on Interest Income (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:fubsbe:20124

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