DOCSLIB.ORG

Investor Taxation, Firm Heterogeneity and Capital Structure Choice

Total Page：16

File Type：pdf, Size：1020Kb

Download full-text PDF Read full-text
Investor Taxation, Firm Heterogeneity and Capital Structure Choice International Tax and Public Finance https://doi.org/10.1007/s10797-019-09536-x Investor taxation, frm heterogeneity and capital structure choice Silke Rünger1 · Rainer Niemann1 · Magdalena Haring1 © The Author(s) 2019 Abstract In this paper, we analyze the efect of investor level taxes, frm-specifc owner- ship structure and frm-specifc dividend payout policy on a frm’s capital structure choice. Our analysis is based on data for 10,003 frms from 11 Central and East- ern European (CEE) countries over the period 2002–2012. Our results show a sig- nifcant positive impact from the net tax beneft of debt on the debt ratio of a frm. Ignoring frm heterogeneity, an increase in the net tax beneft of debt by 10 percent- age points leads to an increase in the debt ratio of 2.68 percentage points. If we add frm-specifc ownership to the analysis, the efect of investor level taxes on the debt ratio is about 1.55 times higher if the frm is wholly owned by a domestic individual investor. For the same type of frm, the efect nearly doubles if we also consider frm-specifc dividend payout policy. Keywords Capital structure · Investor taxation · Ownership · Dividend payout policy JEL Classifcation G32 · H24 · H25 · H32 1 Introduction Since Modigliani and Miller (1958), the efect of taxes on the capital structure of a frm has been under ongoing investigation. From a theoretical standpoint, Miller (1977) showed that both corporate and investor level taxes must be considered in capital structure choices. The beneft arising from interest deductibility at the corpo- rate level must be weighed against the so-called personal tax penalty. A personal tax penalty occurs at the investor level because personal income tax on interest income * Silke Rünger [email protected] 1 Institute of Accounting and Taxation, University of Graz, Universitätsstraße 15, 8010 Graz, Austria Vol.:(0123456789)1 3 S. Rünger et al. from debt is often higher than the personal income tax on equity income (dividends and capital gains). In this paper, we analyze the efect of investor level taxes on capital structure choice and control for frm heterogeneity using frm-specifc ownership structure and frm-specifc dividend payout policy. Prior research has identifed many dif- ferent sources of frm heterogeneity, such as frm size, frm age or frm proftabil- ity, which afect capital structure choice. We, however, focus upon ownership and dividend payout policy as they are pivotal sources of frm heterogeneity that afect investor level taxes. We add to prior literature by providing a more precise estimation of the efect of investor level taxes on capital structure choice. First, contrary to prior research, which assumes that the marginal investor of the frm is a domestic individual inves- tor in the highest tax bracket, we directly observe frm-specifc ownership on a yearly basis and thus can identify the marginal investor of the frm. Second, all of our sample countries apply constant marginal tax rates on all sources of income rele- vant to our analysis (that is, corporate, interest, dividend, and capital gains income). Our setting allows us to calculate the investor level tax burden without the need for investor-specifc information such as the level of other income or holding periods. Third, by considering the frm-specifc dividend payout policy, we can account for the fact that corporate profts can either be distributed to owners as dividends or retained to increase frm value, which leads to future capital gains. We use the Gordon and MacKie-Mason (1990) and Graham (1999) defnition of the net tax beneft of debt to test the efect of investor level taxes on capital structure choice. Our sample consists of 10,003 private frms from 11 CEE countries over the period 2002–2012. We restrict our analysis to countries that apply constant marginal tax rates. If we consider investor level taxes and do not control for frm heterogene- ity, we fnd an increase in the net tax beneft of debt of 10 percentage points to lead to an increase in debt ratios by 2.68 percentage points. When looking at the tax rates individually, we fnd that corporate taxes as well as dividend and capital gains taxes have a signifcant positive impact and the interest tax rate has a signifcant negative impact on debt ratios. We calculate elasticities to assess the economic signifcance of our results and are able to show that taxes are as important as other traditional variables in explaining debt ratios. Pindado and de la Torre (2011) argue that the capital structure of a frm is deter- mined by the incentives of those investors who are in control of the frm. We therefore add to our estimation information on frm-specifc ownership. We show that the efect of investor level taxes on debt ratios increases if we consider frm-specifc ownership, consistent with a reduction in measurement error. We attribute our fndings to two main reasons. Firstly, there is a natural link between frm-specifc ownership and investor level taxes. Investor level tax rates, which are needed for the calculation of the net tax beneft of debt, depend on the investor who is in control of the frm, also called the marginal investor of the frm. Depending upon whether this marginal investor is a fully taxable individual or a tax-exempt institutional investor substantially changes the per- sonal tax penalty. As our dataset allows us to observe the frm-specifc ownership struc- ture and thus the marginal investor of the frm, we are able to show the measurement error that occurs if the marginal investor of a frm is not an individual. Secondly, prior 1 3 Investor taxation, frm heterogeneity and capital structure… research has shown that agency conficts between owners might prevent a tax-efcient capital structure, even if all owners face the same tax rates. We address this problem by varying the defnition of the marginal owner. Our results show that the efect of the div- idend tax rate on debt ratios increases as agency conficts between owners decrease. We fnd the opposite efect for the capital gains tax rate, consistent with liquidity restraints on the disposal of large owner blocks. We expect the frm-specifc dividend payout ratio to afect the capital structure of the frm for two reasons. First, King (1977) claims that there is a direct link between capital structure and frm-specifc dividend payout policy as retained profts add to the equity capital of the frm. Second, as with frm-specifc ownership, there is a natural link between frm-specifc dividend payout policy and investor level taxes. Dividends paid to the investor are taxed upon distribution, whereas retained profts add to the equity capital of the frm and thus increase frm value as well as the capital gain that can be realized by the investor when selling shares of the frm. If dividends and capital gains are taxed at diferent tax rates at the investor level, ignoring capital gains taxation imposes measure- ment error. Consistent with prior literature, we fnd that the efect of the dividend tax rate on capital structure is signifcantly lower if the frm does not pay dividends. If we consider both sources of frm heterogeneity simultaneously, we do not fnd an incremental explanatory power of frm heterogeneity for frms without a majority owner. However, if frms are majority-owned by a domestic individual, controlling jointly for frm-specifc ownership and frm-specifc dividend payout policy increases the efect of the net tax beneft of debt on debt ratios by 38%. We contribute to prior literature regarding capital structure choice in several ways. First, we show that investor level taxes are as important as other traditional variables in explaining debt ratios in private frms. Second, we enhance prior research by analyzing whether controlling for frm heterogeneity yields a more precise measure of the efect of investor level taxes on debt ratios. Third, we are able to show that there is no general improvement in measurement precision when we consider frm heterogeneity. If the frm’s ownership composition causes high agency costs, we fnd no incremental efect from frm heterogeneity on the relation between investor level taxes and debt ratio. Conficting interest of owners mitigates the beneft of a more precise measurement of the net tax beneft of debt. The remainder of this paper is organized as follows: In Sect. 2, we present the model of the net tax beneft of debt and show how frm heterogeneity can be included in the calculation of the net tax beneft of debt. Furthermore, we derive the hypotheses and describe the institutional background. Our data set and descriptive statistics are shown in Sect. 3. Results of our regression analysis are presented in Sect. 4, robustness checks are conducted in Sect. 5. Section 6 concludes. 2 Net tax beneft of debt and institutional background 2.1 Calculation of the net tax beneft of debt including frm heterogeneity From a corporate perspective, interest payments for debt are tax-deductible and cre- ate an interest tax-shield while payments to equity investors are not deductible. As a 1 3 S. Rünger et al. result, debt is more attractive than equity. Miller (1977) shows that this relationship does not necessarily hold if investor level taxes are taken into account. Investor level taxes might cause a so-called personal tax penalty, if dividends and/or capital gains are taxed at lower tax rates than interest payments. Prior empirical research that ana- lyzes capital structures has used the Miller Tax Index (Faccio and Xu 2015) or a linear version of it (Overesch and Voeller 2010; Babbel et al.
Load more

Recommended publications
  • A Reconsideration of Tax Shield Valuation
    European Financial Management, Vol. 11, No. 4, 2005, 453–461 A Reconsideration of Tax Shield Valuation Enrique R. Arzac and Lawrence R. Glosten* 623 Uris Hall, Graduate School of Business, Columbia University, New York, NY 10027, USA. email: [email protected]; [email protected] Abstract A quarter-century ago, Miles and Ezzell (1980) solved the valuation problem of a firm that follows a constant leverage ratio L ¼ D/S. However, to this day, the proper discounting of free cash flows and the computation of WACC are often misunderstood by scholars and practitioners alike. For example, it is common for textbooks and fairness opinions to discount free cash flows at WACC with beta input bS ¼ [1 þ (1 À t)L]bu, although the latter is not consistent with the assump- tion of constant leverage. This confusion extends to the valuation of tax shields and the proper implementation of adjusted present value procedures. In this paper, we derive a general result on the value of tax shields, obtain the correct value of tax shields for perpetuities, and state the correct valuation formulas for arbitrary cash flows under a constant leverage financial policy. Keywords: tax shield valuation; WACC; APV; cost of capital; leveraged beta. JEL classifications: G13, G30, G31, G32, G33 1. A General Result on the Value of Tax Shields under Constant Leverage In their classic work, Modigliani and Miller (1963) show that when the firm maintains a constant level of debt D and pays a tax rate t, the value of the tax shield is VTS ¼ tD. How to value the tax shield in the more interesting case in which the firm maintains a constant leverage ratio is a matter of contention.
    [Show full text]
  • The Debt Tax Shield, Economic Growth and Inequality
    A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics Fischer, Marcel; Jensen, Bjarne Astrup Working Paper The debt tax shield, economic growth and inequality arqus Discussion Paper, No. 219 Provided in Cooperation with: arqus - Working Group in Quantitative Tax Research Suggested Citation: Fischer, Marcel; Jensen, Bjarne Astrup (2017) : The debt tax shield, economic growth and inequality, arqus Discussion Paper, No. 219, Arbeitskreis Quantitative Steuerlehre (arqus), Berlin This Version is available at: http://hdl.handle.net/10419/172203 Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle You are not to copy documents for public or commercial Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich purposes, to exhibit the documents publicly, to make them machen, vertreiben oder anderweitig nutzen. publicly available on the internet, or to distribute or otherwise use the documents in public. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, If the documents have been made available under an Open gelten abweichend von diesen Nutzungsbedingungen die in der dort Content Licence (especially Creative Commons Licences), you genannten Lizenz gewährten Nutzungsrechte. may exercise further usage rights as specified in the indicated licence. www.econstor.eu Arbeitskreis Quantitative Steuerlehre Quantitative Research in Taxation – Discussion Papers Marcel Fischer / Bjarne Astrup Jensen The Debt Tax Shield, Economic Growth and Inequality arqus Discussion Paper No.
    [Show full text]
  • Tax Evasion and Avoidance Through Financial Engineering the State of Play in Europe
    Ref. Ares(2018)5553212 - 30/10/2018 Tax Evasion and Avoidance through Financial Engineering The State of Play in Europe Document Details Work package WP1 Lead Beneficiary The City University Deliverable ID D.1.7 Date 31 October 2018 Submission 30 October 2018 Dissemination Level PU – Public Version 1.0 Author(s) Anastasia Nesvetailova Andrei Guter-Sandu City, University of London City, University of London [email protected] [email protected] Ronen Palan Yuval Millo City, University of London Warwick Business School [email protected] [email protected] Acknowledgements The project has received funding from the European Union’s Horizon 2020 research and innovation programme under grant agreement No 727145. Tax evasion and avoidance through financial Engineering: The state of play in Europe Anastasia Nesvetailova*, Andrei Guter-Sandu, Ronen Palan*** and Yuval Milo****) * Professor of International Political Economy, City, University of London ** Fellow, CITYPERC, City, University of London *** Professor of International Political Economy, City, University of London **** Professor of Accounting, Warwick Business School Acknowledgements The project has received funding from the European Union’s Horizon 2020 research and innovation program under grant agreement No 727145. We thank Professor Thomas Rixen and Dr. Petr Jansky for their comments on an earlier draft. 1 Contents 1. Introduction .............................................................................. 4 1.1. Methodology adopted by this WP1 study ................................... 5 1.2. Policy recommendations ......................................................... 8 1.3. Structure of this report .......................................................... 9 2. Financial innovation and tax abuse: Theory and Evidence .............. 10 3. The landscape of derivatives ...................................................... 15 3.1. A Brief History of Financial Derivatives ..................................
    [Show full text]
  • Finanzierungswirkungen Einer Abgeltenden Zinsbesteuerung
    Wirtschaftswissenschaftliche Fakultät der Eberhard-Karls-Universität Tübingen Wirkungen einer Abgeltungssteuer auf Investitionsentscheidungen und Kapitalstruktur von Unternehmen Dirk Kiesewetter Andreas Lachmund Tübinger Diskussionsbeitrag Nr. 278 April 2004 Wirtschaftswissenschaftliches Seminar Mohlstraße 36, D-72074 Tübingen Inhaltsverzeichnis 1. Problemstellung..............................................................................................................1 2. Investitionswirkungen einer abgeltenden Zinsbesteuerung ........................................... 3 2.1. Investitionsentscheidungen von Einzelunternehmern ............................................. 3 2.2. Investitionen in anderen Gesellschaftsformen......................................................... 5 3. Finanzierungswirkungen einer abgeltenden Zinsbesteuerung ....................................... 6 3.1. Kapitalgesellschaft .................................................................................................. 7 3.2. Personenunternehmung ......................................................................................... 10 3.3. Schlussfolgerungen................................................................................................ 11 4. Modifikationen der Unternehmensbesteuerung für eine finanzierungsneutrale Abgeltungssteuer.............................................................................................................. 12 4.1. Alternative Konzepte der Belastung von Kapitaleinkommen ..............................
    [Show full text]
  • TAXATION and LEVERAGE INSIDE BANK HOLDING COMPANIES Silvia Bressan, MODUL University Vienna
    Accounting & Taxation Vol. 8, No. 1, 2016, pp. 27-37 ISSN: 1944-592X (print) www.theIBFR.com ISSN: 2157-0175 (online) TAXATION AND LEVERAGE INSIDE BANK HOLDING COMPANIES Silvia Bressan, MODUL University Vienna ABSTRACT This paper examines the effect of leverage on the corporate taxes paid by United States Bank Holding Companies. We find that, Bank Holding Companies reduce their tax burden when debt is raised from subsidiaries. However, taxes do not significantly change when debt is raised from the parent firm. Our view is that, the more favorable fiscal treatment of corporate debt against equity, gives an incentive to Bank Holding Companies towards the tax consolidation of subsidiaries. In this way they take advantage of the tax shield of the affiliates. The empirical results indicate that, the funding structure of the group plays a role on taxation. The results are important for the understanding of tax avoidance inside large banking institutions. JEL: G21, G32 KEYWORDS: Bank Holding Companies, Taxation, Leverage INTRODUCTION he possibility to deduct interest paid on debt issuances from taxable income may lead corporations to adopt highly levered capital structures. This issue becomes especially relevant in the banking Tindustry. Indeed, when financial firms take-on large amounts of debt, with respect to tiny shares of equity, the financial system becomes more fragile. This paper questions whether the tax burden of Bank Holding Companies (BHCs) is affected by their capital structure. The main goal is to understand whether BHCs can use funding strategies to avoid taxes. We define tax avoidance as Hanlon and Heitzman (2010), namely as the reduction in the explicit corporate taxes.
    [Show full text]
  • Taxation and the Financial Crisis
    A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics Alworth, Julian S. (Ed.); Arachi, Giampaolo (Ed.) Book — Published Version Taxation and the Financial Crisis Provided in Cooperation with: Oxford University Press (OUP) Suggested Citation: Alworth, Julian S. (Ed.); Arachi, Giampaolo (Ed.) (2012) : Taxation and the Financial Crisis, ISBN 978-0-19-969816-5, Oxford University Press, Oxford, http://dx.doi.org/10.1093/acprof:oso/9780199698165.001.0001 This Version is available at: http://hdl.handle.net/10419/118674 Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle You are not to copy documents for public or commercial Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich purposes, to exhibit the documents publicly, to make them machen, vertreiben oder anderweitig nutzen. publicly available on the internet, or to distribute or otherwise use the documents in public. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, If the documents have been made available under an Open gelten abweichend von diesen Nutzungsbedingungen die in der dort Content Licence (especially Creative Commons Licences), you genannten
    [Show full text]
  • Special Purpose Vehicles and Securitization
    This PDF is a selection from a published volume from the National Bureau of Economic Research Volume Title: The Risks of Financial Institutions Volume Author/Editor: Mark Carey and René M. Stulz, editors Volume Publisher: University of Chicago Press Volume ISBN: 0-226-09285-2 Volume URL: http://www.nber.org/books/care06-1 Conference Date: October 22-23, 2004 Publication Date: January 2007 Title: Special Purpose Vehicles and Securitization Author: Gary B. Gorton, Nicholas S. Souleles URL: http://www.nber.org/chapters/c9619 12 Special Purpose Vehicles and Securitization Gary B. Gorton and Nicholas S. Souleles 12.1 Introduction This paper analyzes securitization and, more generally, “special purpose vehicles” (SPVs), which are now pervasive in corporate finance.1 What is the source of value to organizing corporate activity using SPVs? We argue that SPVs exist in large part to reduce bankruptcy costs, and we find evi- dence consistent with this view, using unique data on credit card securitiza- tions. The way in which the reduction in costs is accomplished sheds some light on how bank risk should be assessed. By financing the firm in pieces, some on–balance sheet and some off– balance sheet, control rights to business decisions are separated from fi- nancing decisions. The SPV-sponsoring firm maintains control over busi- ness decisions, whereas the financing is done in SPVs, which are passive; they cannot make business decisions. Furthermore, the SPVs are not sub- ject to bankruptcy costs because they cannot in practice go bankrupt, as a matter of design. Bankruptcy is a process of transferring control rights over corporate assets.
    [Show full text]
  • Income Tax and Capital Structure of Multinational Corporations Deqiang
    Advances in Economics, Business and Management Research, volume 133 3rd International Conference on Advances in Management Science and Engineering (IC-AMSE 2020) Income Tax and Capital Structure of Multinational Corporations Deqiang Deng1,2 and Rui Shao2,* 1School of Accounting, Nanjing Audit University, No. 86 Yushan West Road, Nanjing, 211815, China 2School of Economics and Management, Nanjing University of Science and Technology, No. 200, Xiao Ling Wei, Nanjing, 210094, China *Corresponding author Keywords: multinational corporations, income tax, capital structure Abstract. With economic globalization and the deepening of international division of labor, multinational corporations have become an important part of the world economy. Different from the scope of business activities in which domestic enterprises are only distributed in one country, the scope of business activities of multinational corporations extends to a number of countries and regions. Therefore, the complex and diversified business activities environment and characteristics of it have caused a special impact decision system for the capital structure of multinational corporations. The operations of multinational companies are affected by exchange rates and national policies, and they have special risks and advantages. In particular, multinational companies face a complex tax environment. The income tax has an impact on the capital structure of multinational corporations. The theoretical basis of this effect includes MM theory and trade-off theory. The decision of capital structure is an important financial issue for multinational companies. This paper summarizes some conclusions and suggestions based on the literature on capital structure and tax burden of multinational corporations. Introduction As an important part of financial theory, capital structure theory not only relates to the decision-making of corporate capital structure, but also provides an important theoretical basis for the process of business management.
    [Show full text]
  • An Essay on the Effects of Taxation on the Corporate Financial Policy
    An Essay on the Effects of Taxation on the Corporate Financial Policy George Contos, Internal Revenue Service he taxation of corporate profits in the United States decisions made by taxable corporations. The magnitude has been one of the most widely discussed issues of those effects and their overall impact on the economy Tin the area of public finance. Corporate revenues are still under debate. Jane Gravelle (1995) divides the are currently subject to double taxation. Profits are taxed debate on corporate taxation into three key issues. “First first at the corporate level and then, when distributed who carries the burden of corporate tax--capital, labor, as dividends or when capital gains are realized, taxed or consumers, and does it play a role in a progressive a second time at the individual level. The share of tax tax system? Second, how significant are the distortions revenues from corporate profits has been decreasing caused by the excess corporate tax? And third, how can steadily over the past four decades. In 1962, corporate the revenues raised from corporate tax be replaced?” tax receipts accounted for 21 percent of all tax revenues, This paper focuses on the second question and more 1 but, by 2003, their share dropped to 7.5 percent. In 2003, specifically on how the deductibility of interest affects a proposal by the Bush Administration brought corporate the capital structure of taxable corporations. I test the tax integration back to the front pages. The final legisla- hypothesis that taxable corporations have a tax incentive tion, the Jobs and Growth Tax Relief Reconciliation Act to use debt financing versus equity financing because of 2003, did not eliminate double taxation, but it did interest paid is tax-deductible while dividends paid to reduce the taxation of corporate profits at the individual shareholders are not.
    [Show full text]
  • Beps Actions 8 - 10
    Comments Received on the Public Discussion Draft BEPS ACTIONS 8 - 10 Financial transactions Part II 14 September 2018 Table of contents (Part II) DTEK Energy .......................................................................................................................... 3 Duff & Phelps ........................................................................................................................ 4 EBIT ....................................................................................................................................... 22 Embridge Economics B.V ...................................................................................................... 32 Erste Group Bank AG............................................................................................................. 37 European Banking Federation .............................................................................................. 42 European Captive Insurance and Reinsurance Owners` Association ................................... 53 Eversheds Sutherland ........................................................................................................... 61 EY ........................................................................................................................................... 66 Fantozzi & Associati - Studio Legale Tributario ..................................................................... 96 Federation of European Risk Management Associations ..................................................... 115
    [Show full text]
  • Effective Tax Rates Under IP Tax Planning
    A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics Evers, Lisa; Spengel, Christoph Working Paper Effective tax rates under IP tax planning ZEW Discussion Papers, No. 14-111 Provided in Cooperation with: ZEW - Leibniz Centre for European Economic Research Suggested Citation: Evers, Lisa; Spengel, Christoph (2014) : Effective tax rates under IP tax planning, ZEW Discussion Papers, No. 14-111, Zentrum für Europäische Wirtschaftsforschung (ZEW), Mannheim, http://nbn-resolving.de/urn:nbn:de:bsz:180-madoc-374564 This Version is available at: http://hdl.handle.net/10419/105814 Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle You are not to copy documents for public or commercial Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich purposes, to exhibit the documents publicly, to make them machen, vertreiben oder anderweitig nutzen. publicly available on the internet, or to distribute or otherwise use the documents in public. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, If the documents have been made available under an Open gelten abweichend von diesen Nutzungsbedingungen die in der dort Content Licence (especially Creative Commons Licences), you genannten Lizenz gewährten Nutzungsrechte. may exercise further usage rights as specified in the indicated licence. www.econstor.eu Dis cus si on Paper No. 14-111 Effective Tax Rates under IP Tax Planning Lisa Evers and Christoph Spengel Dis cus si on Paper No.
    [Show full text]
  • Taxpayer Wealth and Federal Tax Revenue Under a Tax Policy That Shields Retained Earnings Used for Growth from Taxes
    eJournal of Tax Research (2021) vol. 19, no. 1, pp. 48-96 Taxpayer wealth and federal tax revenue under a tax policy that shields retained earnings used for growth from taxes Robert M Hull and John B Hull Abstract This article addresses shortcomings in US tax policy: the interest tax shield (ITS) that favours debt over equity; the unfavourable tax treatment of retained earnings (RE) that is used for growth; and the inequalities in the taxing of ownership forms. Taxpayer wealth is calculated under the assumption that growth increases 0.78% with the enactment of the Tax Cuts and Jobs Act of 2017 (TCJA), which is an increase projected by tax experts. We discover that taxpayer wealth under TCJA with an ITS increases 15.69% beyond it pre-TCJA value; total federal tax revenue (TFTR) decreases 4.20%; and C corporations are no longer taxed more heavily than pass-throughs. If we replace an ITS with a 50% retained earnings tax shield (½RTS) where half of every dollar used for RE is shielded from taxes, we show that taxpayer wealth increases 4.51% and TFTR rises 3.15%. If we replace a ½RTS with an RTS (where 100% of RE is shielded from taxes), we find that taxpayer wealth and TFTR together increase 5.53%. The switch to an RTS further serves to equalise the taxing of pass-throughs and C corporations. Finally, switching from an ITS to an RTS does not materially alter the optimal debt-to-firm value ratio. Key words: Taxpayer wealth, federal tax revenue, business growth, federal debt, tax shields, Capital Structure Model Clarence W King Chair, Professor of Finance, School of Business, Washburn University, Topeka, Kansas, USA, [email protected].
    [Show full text]