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Cash-flow Business Taxation Revisited: Bankruptcy, Risk Aversion And Asymmetric Information

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

No 1372, Working Paper from Economics Department, Queen's University

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. 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: asymmetric information; cash-flow tax; risk-averse firms (search for similar items in EconPapers)
JEL-codes: H21 H25 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2016-12
New Economics Papers: this item is included in nep-acc
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Downloads: (external link) First version 2016 (application/pdf)

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 (2015) Downloads
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