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Cash-flow business taxation revisited: bankruptcy and asymmetric information

Robin Boadway (), Motohiro Sato () and Jean-François Tremblay ()
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Motohiro Sato: Hitotsubashi University
Jean-François Tremblay: University of Ottawa

International Tax and Public Finance, 2022, vol. 29, issue 4, No 5, 922-952

Abstract: Abstract We study the effects of cash-flow taxation on firms’ entry and investment decisions when there is bankruptcy risk and when banks face asymmetric information problems in financing heterogeneous firms. When there is moral hazard, firms under-invest, while with adverse selection too many firms enter. Cash-flow taxation applying to both real and financial cash flows corrects these distortions by inducing more investment in rent-generating projects where moral hazard exists and reducing firm entry under adverse selection. Our results in the moral hazard case depend on the tax losses of bankrupt firms accruing to the banks. If bankrupt firms retain tax losses, the cash-flow corporate tax is neutral as in Bond and Devereux (J Public Econ 87:1291–1311, 2003).

Keywords: Cash-flow tax; Bankruptcy; Asymmetric information (search for similar items in EconPapers)
JEL-codes: H21 H25 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1007/s10797-021-09696-9

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