Do Taxes Affect Corporate Debt Policy? Evidence from Us Corporate Tax Return Data

27 Pages Posted: 11 Feb 2000 Last revised: 2 Apr 2001

See all articles by Roger H. Gordon

Roger H. Gordon

University of California, San Diego (UCSD) - Department of Economics; Harvard University - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Young Lee

University of Maryland - Center on Institutional Reform and the Informal Sector (IRIS)

Date Written: December 1999

Abstract

Past attempts to measure the impact of taxes on corporate debt policy have focused on larger firms. Given that the top statutory corporate tax rate has varied little in recent years, tax incentives vary among these firms, almost entirely due to current or prospective tax losses. Results are inevitably mixed, given that firms with losses or nondebt tax shields may have different propensities to borrow even ignoring taxes. This paper uses US Statistics of Income balance sheet data on all corporations, to compare the debt policies of firms of different sizes. Given the progressivity in the corporate tax schedule, small firms face very different tax rates than larger firms. Relative tax rates have also changed frequently over time. Our results suggest that taxes have had a strong and statistically significant effect on debt levels. In particular, the difference in corporate tax rates currently faced by the largest vs. the smallest firms (35% vs. 15%) is forecast to induce larger firms to finance an additional 8% of their assets with debt, compared with smaller firms.

Suggested Citation

Gordon, Roger H. and Lee, Young, Do Taxes Affect Corporate Debt Policy? Evidence from Us Corporate Tax Return Data (December 1999). NBER Working Paper No. w7433. Available at SSRN: https://ssrn.com/abstract=203154

Roger H. Gordon (Contact Author)

University of California, San Diego (UCSD) - Department of Economics ( email )

9500 Gilman Drive
La Jolla, CA 92093-0508
United States
858-534-4828 (Phone)
858-534-7040 (Fax)

Harvard University - Department of Economics ( email )

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United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Young Lee

University of Maryland - Center on Institutional Reform and the Informal Sector (IRIS)

2105 Morrill Hall
College Park, MD 20742
United States

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