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Cash-flow business taxation revisited: bankruptcy, risk aversion and asymmetric information

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

No 1531, Working Papers from Oxford University Centre for Business Taxation

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. 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. The ACE tax distorts firms¡¯ decisions when bankruptcy risk exists. We characterize the nature of such distortions and consider how cash-flow taxes would have to be amended to achieve neutrality.

Keywords: cash-flow tax; risk-averse firms; asymmetric information (search for similar items in EconPapers)
JEL-codes: H21 H25 (search for similar items in EconPapers)
Date: 2015
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Related works:
Working Paper: Cash-Flow Business Taxation Revisited: Bankruptcy, Risk Aversion and Asymmetric Information (2017) Downloads
Working Paper: Cash-flow Business Taxation Revisited: Bankruptcy, Risk Aversion And Asymmetric Information (2016) Downloads
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