Trade Credit and Taxes

32 Pages Posted: 29 Jan 2012

See all articles by Mihir A. Desai

Mihir A. Desai

Harvard Business School - Finance Unit; National Bureau of Economic Research (NBER)

C. Fritz Foley

Harvard Business School; National Bureau of Economic Research (NBER)

James R. Hines Jr.

University of Michigan; NBER

Multiple version iconThere are 2 versions of this paper

Date Written: January, 23 2012

Abstract

This paper analyzes the effects of taxation on trade credit financing, which takes the form of accounts payable and accounts receivable. High tax rates discourage investment, and as a consequence, firms in high-tax jurisdictions have greater pretax marginal products of capital than do firms in low-tax jurisdictions. Differences in pretax marginal products of capital create incentives to use trade credit finance to reallocate capital, typically from firms with low tax rates to those with high tax rates. Trade credit can also be used to reallocate taxable income among related parties. Evidence from the worldwide operations of U.S. multinational firms indicates that affiliates in low-tax jurisdictions use trade credit to lend to others: ten percent lower local tax rates are associated with net trade credit positions that are 1.4 percent higher as a fraction of sales. The use of trade credit to get capital out of low-tax, low-marginal product environments is also illustrated by the reaction of U.S. firms to the temporary repatriation tax holiday in 2005, when affiliates with positive net trade credit positions were more likely than others to repatriate dividends to parent companies in the U.S.

Keywords: Trade credit, working capital, corporate taxation

JEL Classification: H25, H87

Suggested Citation

Desai, Mihir A. and Foley, C. Fritz and Hines, James Rodger, Trade Credit and Taxes (January, 23 2012). Available at SSRN: https://ssrn.com/abstract=1990765 or http://dx.doi.org/10.2139/ssrn.1990765

Mihir A. Desai

Harvard Business School - Finance Unit ( email )

Boston, MA 02163
United States
617-495-6693 (Phone)
617-496-6592 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

C. Fritz Foley

Harvard Business School ( email )

Soldiers Field Road
Morgan 270C
Boston, MA 02163
United States
617-495-6375 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

James Rodger Hines (Contact Author)

University of Michigan ( email )

625 South State Street
Ann Arbor, MI 48109-1215
United States

NBER

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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