The Influence of Income Taxes on the Use of Inside and Outside Debt by Small Businesses
Posted: 24 May 2001
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The Influence of Income Taxes on the Use of Inside and Outside Debt by Small Businesses
Abstract
We investigate the effect of taxes on the utilization of inside debt (loans from owners) and outside debt (loans from non-owners) across small businesses organized as taxable corporations and flow-through entities (Subchapter S corporations and partnerships). We find that the tax incentives to use debt differ according to the type of debt and the type of entity. Our results indicate that the effect of marginal tax rates on the use of outside debt and other non-debt tax shields is similar for both taxable and flow-through entities. In contrast, we find that marginal tax rates are unrelated to the use of inside debt by flow-through entities.
JEL Classification: G32, H25
Suggested Citation: Suggested Citation