Taxes Depress Corporate Borrowing: Evidence from Private Firms

Ivan T. Ivanov, Luke Pettit and Toni Whited

No 32398, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We use variation in state corporate income tax rates to re-examine the relation between taxes and corporate leverage. Contrary to prior research, we find that corporate leverage rises after tax cuts for small private firms. An estimated dynamic equilibrium model shows that tax cuts make capital more productive and spur borrowing. Tax cuts also produce more distant default thresholds and lower credit spreads. These effects outweigh the lower interest tax deduction and lead to higher optimal leverage choices, especially for firms with flexible investment policies. The presence of the interest tax deduction raises consumer welfare in equilibrium.

JEL-codes: G31 G32 H25 (search for similar items in EconPapers)
Date: 2024-05
New Economics Papers: this item is included in nep-acc, nep-cfn, nep-fdg, nep-pbe and nep-pub
Note: CF
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Working Paper: Taxes Depress Corporate Borrowing: Evidence from Private Firms (2021)
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