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  4. Preliminary Program
  5. Corporate Taxes and Firms' Behaviors
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Corporate Taxes and Firms' Behaviors

Paper Session

Friday, Jan. 7, 2022 12:15 PM - 2:15 PM (EST)

Hosted By: American Economic Association
  • Chair: Juan Carlos Suarez Serrato, Duke University

Taxes Depress Corporate Borrowing: Evidence from Private Firms

Ivan T. Ivanov
,
Federal Reserve Board
Luke Pettit
,
United States Senate
Toni Whited
,
University of Michigan

Abstract

We re-examine the relation between taxes and corporate leverage, using variation in state corporate income tax rates. In contrast with prior research, we document that corporate leverage increases following tax cuts for both privately held and publicly listed firms. We use an estimated dynamic equilibrium model to show that tax cuts result in lower default spreads and more distant default thresholds. These effects outweigh the loss of benefits from the interest tax deduction and lead to higher leverage, especially for privately held firms. Overall, debt tax shields appear to be a secondary capital structure consideration.

Capital Investment and Labor Demand

Mark Curtis
,
Wake Forest University
Daniel G. Garrett
,
University of Pennsylvania
Eric Ohrn
,
Grinnell College
Kevin A. Roberts
,
Duke University
Juan Carlos Suarez Serrato
,
Duke University

Abstract

We study how tax policies that lower the cost of capital impact investment and labor demand. Difference-in-differences estimates using confidential US Census Data on manufacturing establishments show that tax policies increased both investment and employment, but did not lead to wage or productivity gains. Using a structural model, we show that the primary effect of the policy was to increase the use of all inputs by lowering overall costs of production. The policy further stimulated production employment due to the complementarity of production labor and capital. Supporting this conclusion, we find that investment is greater in plants with lower labor costs. Our results show that recent tax policies that incentivize capital investment do not lead manufacturing plants to replace workers with machines.

Higher Dividend Taxes, No Problem! Evidence from Taxing Entrepreneurs in France

Adrien Matray
,
Princeton University
Charles Boissel
,
HEC Paris

Abstract

This paper investigates the 2013 three-fold increase in the French dividend tax rate. Using administrative data covering the universe of firms over 2008--2017 and a quasi-experimental setting, we find that firms swiftly cut dividend payments and used this tax-induced increase in liquidity to invest more. Heterogeneity analyses show that firms with high demand and returns on capital responded most while no group of firms cut their investment. Our results reject models in which higher dividend taxes increase the cost of capital and show that the tax-induced increase in liquidity relaxes credit constraints which can reduce capital misallocation.

Discussant(s)
Nirupama Rao
,
University of Michigan
Tuomas Matikka
,
VATT Institute for Economic Research
Francois Gourio
,
Federal Reserve Bank of Chicago
Katarzyna Bilicka
,
Utah State University
JEL Classifications
  • H2 - Taxation, Subsidies, and Revenue
  • G0 - General