Heterogeneous Responses to Corporate Marginal Tax Rates: Evidence from Small and Large Firms

59 Pages Posted: 9 Jun 2019 Last revised: 20 Sep 2023

See all articles by Omid Eskandari

Omid Eskandari

University of York - Department of Economics and Related Studies

Morteza Zamanian

Amirkabir University of Technology

Date Written: July 8, 2019

Abstract

Do small and large firms respond differently to tax cuts? Using new narrative measures of the exogenous variation in corporate marginal tax rates and a unique dataset of U.S. manufacturing firms, we find that the investment of large firms is more sensitive to a marginal tax cut than that of small firms. Furthermore, we show that small firms finance their new investments almost entirely through debt, whereas large firms use both cash and debt. Following a tax cut, the tax advantage of debt financing falls relative to cash financing. This substitution effect is more pronounced for large firms and induces them to rely on cash financing to a larger extent than small firms.

Keywords: Narrative Method, Corporate Marginal Tax Rates, Small and Large Firms, Real and Financial Decisions

JEL Classification: C32, C53, E62, G32, H32

Suggested Citation

Eskandari, Ruhollah and Zamanian, Morteza, Heterogeneous Responses to Corporate Marginal Tax Rates: Evidence from Small and Large Firms (July 8, 2019). Available at SSRN: https://ssrn.com/abstract=3392479 or http://dx.doi.org/10.2139/ssrn.3392479

Ruhollah Eskandari (Contact Author)

University of York - Department of Economics and Related Studies ( email )

Heslington
York, YO1 5DD
United Kingdom

Morteza Zamanian

Amirkabir University of Technology ( email )

P.O. Box 15875-4413
Tehran
Iran

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