Effects of LBOs on Tax Revenues of the U.S. Treasury

Tax Notes, Vol. 42, No. 6, 1989

18 Pages Posted: 16 Aug 2000  

Michael C. Jensen

SSRN; Harvard Business School; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI); Harvard University - Accounting & Control Unit

Steven N. Kaplan

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

Laura Stiglin

Econalytics

Date Written: 1989

Abstract

In this report, the tax effects of leveraged buyouts (LBOs) based on the current tax law and data from LBOs during the period 1979 through 1985 are examined. The analysis challenges the argument that LBOs result in net losses of tax revenues to the U.S. Treasury. Five ways are shown in which LBOs can generate incremental revenues to the U.S. Treasury: increased capital gains taxes for shareholders; increased operating revenues; interest income earned by LBO creditors; more efficient use of capital; and asset sales triggering additional corporate taxes on the capital gains. Offsetting these incremental revenue gains are: increased interest deductions on the LBO debt and lower tax revenues on dividends foregone. We conclude that the U.S. Treasury's revenues from LBO firms have increased over the time period examined and that policies that restrict LBOs likely will reduce future tax revenues received by the Federal government.

Suggested Citation

Jensen, Michael C. and Kaplan, Steven N. and Stiglin, Laura, Effects of LBOs on Tax Revenues of the U.S. Treasury (1989). Tax Notes, Vol. 42, No. 6, 1989. Available at SSRN: https://ssrn.com/abstract=173454 or http://dx.doi.org/10.2139/ssrn.173454

Michael C. Jensen (Contact Author)

SSRN ( email )

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Harvard Business School ( email )

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National Bureau of Economic Research (NBER) ( email )

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European Corporate Governance Institute (ECGI) ( email )

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Harvard University - Accounting & Control Unit ( email )

Soldiers Field
Boston, MA 02163
United States

Steven Neil Kaplan

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-702-4513 (Phone)
773-702-0458 (Fax)

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

Laura Stiglin

Econalytics ( email )

61 Hunnewell Street
Wellesley, MA 02481
United States

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