The Effect of Taxation on Corporate Financing and Investment

40 Pages Posted: 2 Dec 2016 Last revised: 10 Apr 2019

See all articles by Hong Chen

Hong Chen

Shanghai Advanced Institute in Finance, Shanghai Jiao Tong University

Murray Z. Frank

University of Minnesota

Date Written: April 8, 2019

Abstract

Extensive empirical research into the impact of taxes on corporate investment has had trouble identifying unambiguous effects. We build a model with taxes on the household/investor and on the firm, to study the tax effects. A key idea is that the firm maximizes the after-tax wealth of the household and therefore chooses an efficient level of production. Corporate tax reduces optimal physical capital despite interest deductibility, and produces a Laffer curve. The model generates a number of tax irrelevance results that may help explain why it has been so difficult to find clear evidence of tax effects.

Keywords: corporate tax, dividend tax, consumption tax, dividend policy, equity, debt, investment, Laffer curve

JEL Classification: G31, G32, G35, D92, H25

Suggested Citation

Chen, Hong and Frank, Murray Z., The Effect of Taxation on Corporate Financing and Investment (April 8, 2019). Available at SSRN: https://ssrn.com/abstract=2878057 or http://dx.doi.org/10.2139/ssrn.2878057

Hong Chen

Shanghai Advanced Institute in Finance, Shanghai Jiao Tong University ( email )

Shanghai, 200052
China

Murray Z. Frank (Contact Author)

University of Minnesota ( email )

Carlson School of Management
321 19th Avenue South
Minneapolis, MN 55455
United States
612-625-5678 (Phone)

Register to save articles to
your library

Register

Paper statistics

Downloads
271
Abstract Views
944
rank
113,281
PlumX Metrics