Taxes Depress Corporate Borrowing: Evidence from Private Firms

50 Pages Posted: 18 Sep 2020 Last revised: 2 Apr 2021

See all articles by Ivan Ivanov

Ivan Ivanov

Board of Governors of the Federal Reserve System

Luke Pettit

US Senate

Toni M. Whited

University of Michigan, Stephen M. Ross School of Business; National Bureau of Economic Research

Date Written: September 18, 2020

Abstract

We re-examine the relation between taxes and corporate leverage, using variation in state corporate income tax rates. In contrast with prior research, we document that corporate leverage increases following tax cuts for both privately held and publicly listed firms. We use an estimated dynamic equilibrium model to show that tax cuts result in lower default spreads and more distant default thresholds. These effects outweigh the loss of benefits from the interest tax deduction and lead to higher leverage, especially for privately held firms. Overall, debt tax shields appear to be a secondary capital structure consideration.

Keywords: corporate income taxes, leverage, investment, structural estimation

JEL Classification: G32, G31

Suggested Citation

Ivanov, Ivan and Pettit, Luke and Whited, Toni M., Taxes Depress Corporate Borrowing: Evidence from Private Firms (September 18, 2020). Available at SSRN: https://ssrn.com/abstract=3694869 or http://dx.doi.org/10.2139/ssrn.3694869

Ivan Ivanov (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Luke Pettit

US Senate ( email )

U.S. Senate Committee
on Banking, Housing and Urban Affairs 534 Dirksen Senate Office Building
Washington, DC 20510
United States

Toni M. Whited

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

National Bureau of Economic Research ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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