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, Japan

No 1713E, Working Papers from University of Ottawa, 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 risk-neutral 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. In these circumstances, investment decisions are distorted, with investment being less than in the full-information case. Cash-flow taxation corrects the distortion by inducing more investment in rent-generating projects and increasing social welfare. An ACE tax is equivalent to a cash-flow tax but is easier to implement under asymmetric information.

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)
Pages: 38 pages
Date: 2017
New Economics Papers: this item is included in nep-cfn and nep-pbe
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Related works:
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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