Taxes Depress Corporate Borrowing: Evidence from Private Firms

76 Pages Posted: 18 Sep 2020 Last revised: 10 Jun 2022

See all articles by Ivan Ivanov

Ivan Ivanov

Federal Reserve Bank of Chicago

Luke Pettit

US Senate

Toni M. Whited

University of Michigan, Department of Economics; 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 rises after tax cuts, mostly for small private firms, but to a lesser extent for public firms. We use an estimated dynamic equilibrium model to show that tax cuts result in more distant default thresholds and thus lower credit spreads. These effects outweigh the loss of the interest tax deduction and lead to higher optimal leverage choices, especially for firms with stringent default conditions, such as the small private firms we study.

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)

Federal Reserve Bank of Chicago ( email )

230 South LaSalle Street
Chicago, IL 60604
United States

HOME PAGE: http://ivantivanov.com

Luke Pettit

US Senate

U.S. Senate
Washington, DC 20510
United States

Toni M. Whited

University of Michigan, Department of Economics ( email )

735 S. State Street
Ann Arbor,, MI 48109

National Bureau of Economic Research ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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