Taxes Depress Corporate Borrowing: Evidence from Private Firms
50 Pages Posted: 18 Sep 2020 Last revised: 2 Apr 2021
Date Written: September 18, 2020
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: Suggested Citation