The Effect of Taxation on Corporate Financing and Investment

Review of Corporate Finance Studies

48 Pages Posted: 2 Dec 2016 Last revised: 24 Mar 2021

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: November 15, 2019

Abstract

Extensive empirical research concerning the impact of taxes on corporate decisions has had trouble identifying seemingly obvious effects. Perhaps the problem is that the seemingly obvious tax predictions are not quite right. We provide an equilibrium model with both corporate and personal taxes. In steady state equilibrium, the level of production is affected by the corporate tax rate despite interest deductibility at the firm level; but not by the household level taxes on interest earnings or dividends. Several other tax irrelevance results are also proved. There is a Laffer curve in the corporate tax rate.

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 (November 15, 2019). Review of Corporate Finance Studies, 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)

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