Cash-Flow Business Taxation Revisited: Bankruptcy, Risk Aversion and Asymmetric Information

Robin Boadway, Motohiro Sato and Jean-François Tremblay

No 274698, Queen's Economics Department Working Papers from Queen's University - Department of Economics

Abstract: It is well-known that cash-flow business taxes with full loss-offset, and their present-value equivalents, are neutral with respect to firms’ investment decisions when firms are riskneutral and there are no distortions. We study the effects of cash-flow business taxation when there is bankruptcy risk, when firms are risk-averse, and when financial intermediaries face asymmetric information problems in financing heterogeneous firms. Cash-flow taxes remain neutral under bankruptcy risk alone, but can distort the entry and investment decisions of firms under both risk-aversion and asymmetric information. We characterize the nature of such distortions and show that cash-flow taxes can increase social welfare in this context. An ACE tax is equivalent to a cash-flow tax but is easier to implement under asymmetric information.

Keywords: Demand and Price Analysis; Financial Economics (search for similar items in EconPapers)
Pages: 40
Date: 2016-12
New Economics Papers: this item is included in nep-acc
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https://ageconsearch.umn.edu/record/274698/files/qed_wp_1372.pdf (application/pdf)

Related works:
Working Paper: Cash-Flow Business Taxation Revisited: Bankruptcy, Risk Aversion and Asymmetric Information (2017)
Working Paper: Cash-flow Business Taxation Revisited: Bankruptcy, Risk Aversion And Asymmetric Information (2016)
Working Paper: Cash-flow business taxation revisited: bankruptcy, risk aversion and asymmetric information (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:ags:quedwp:274698

DOI: 10.22004/ag.econ.274698

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