Doing so would reduce the value of shareholders' option to default, benefiting debtholders at shareholders' expense. Liandong Zhang, Luo Zuo, and I focus on a different corporate choice: how much risk to take. Prominent examples are investments in physical assets, production processes, and new products or technologies. As has been recognized since at least the s, income taxes affect risk-taking because they induce an asymmetry in a firm's payoffs.
To see how, consider a firm that has access to two projects, A and B, with two equally likely outcomes, "good" and "bad. Project risk is idiosyncratic and hence diversifiable. If the tax rate increases from zero to 30 percent, the expected after-tax profit of each project falls, but it falls by more for the risky project B than for the safe project A.
The reason is that the government shares in the firm's profit but not—absent full tax loss offsets—in the firm's loss. Given this asymmetry, a risk-neutral firm will prefer the safe project to the risky project as the tax rate increases. Again using the state tax changes, we estimate the tax sensitivity of various firm-level measures of risk-taking, such as the volatility of quarterly earnings.
We find that firms reduce earnings volatility by an average of 2. This effect is estimated over the three years following a tax increase and becomes stronger when we give firms more time to adjust their risk profiles. The main way in which firms reduce risk is to shorten their operating cycles, which puts less capital at risk, in particular in the form of inventories. As in the case of the tax sensitivity of debt, we find evidence of asymmetry: While firms reduce risk significantly when tax rates increase, they do not, on average, increase risk when tax rates fall.
One reason to expect firms not to increase risk in response to a tax cut is that their creditors, whose claims would decline in value if risk increased, constrain their ability to do so, for example through the use of debt covenants. Consistent with this prediction, we show that firms with low financial leverage, which presumably face fewer constraints, increase risk in response to tax cuts, whereas high-leverage firms, which presumably face more constraints, do not.
Smolyansky and I investigate how firm employment and wages respond to tax changes. Firm-level data on employment and wages are not systematically available, even for publicly listed firms, so instead we use county-level data from the U. Bureau of Economic Analysis. To disentangle the effect of corporate taxes from business cycle effects that may coincide with, or potentially even drive, state tax changes, we compare contiguous counties straddling state borders.
The idea is to exploit a spatial policy discontinuity when forming control groups. Because a state's tax jurisdiction stops at its border, a county's immediate neighbors on the other side of the border share plausibly similar economic conditions while being subject to discretely different tax policies. Our empirical results show that corporate tax changes affect firm employment and wages [See Figure 2], and that they do so asymmetrically: While tax increases hurt employment and income in treated counties, tax cuts have little effect.
All else equal, a one-percentage-point increase in corporate income taxes reduces employment by between 0. Tax cuts, on the other hand, have no significant effect on either employment or wages unless they are implemented during a recession, when they lead to sizeable increases in both employment and wages.
One potential challenge to our contiguous-border-county strategy is that tax changes on one side of the border could trigger changes in the behavior of firms or households across the border. For example, the fall in wages following a tax increase could spill over to control counties if affected households spend less money not just at home but also in neighboring counties.
This would attenuate the estimated tax sensitivity, as the tax increase would hurt both the treated and the control county. To deal with such potential spillovers, we compare border counties to hinterland counties located further inside the untreated states. To the extent that spillovers dissipate with distance from the state border, we would expect employment and wages to decline in border control counties compared to hinterland counties.
Instead, we find no difference in employment or wage growth within untreated states, regardless of proximity to the border, suggesting that spillovers do not play a major role in our setting. The examples presented above suggest that state-level variations in taxes are useful for exploring a number of tax-related research questions.
While these changes are generally small, measuring perhaps a percentage point, they apparently are economically meaningful in light of the responses they elicit from firms, in terms of their use of debt, their risk-taking, and their employment decisions. Whether these responses are too large, too small, or just right is an open question. An interesting theme that emerges from these three examples is that taxes often have an asymmetric effect.
In the case of capital structure, asymmetry is a prediction of one prominent class of models but not of others, which can help us to discriminate empirically between different capital structure theories. In the case of risk-taking, asymmetry is to be expected—if not predicted—given the insights of the literature on risk shifting and asset substitution at highly leveraged firms.
In the case of firms' employment decisions, asymmetry is more of a surprise. There remains much interesting work to be done on the various ways in which corporate taxes affect economic activity.
State taxes, modest though they may often seem, are a useful addition to our empirical toolbox. He received a master's degree in international business from Lund University in and M.
He is a former two-term editor of the Review of Financial Studies. Ljungqvist's research interests include corporate finance, corporate governance, investment banking, entrepreneurial finance, private equity, venture capital, innovation, forensic finance, and asset pricing.
He is the recipient of the Kauffman Prize Medal for his work on venture capital. Ljungqvist currently lives in New York City, where he moved after living for ten years each in Sweden, Germany, and the United Kingdom. He has taught at the University of Oxford, the University of Cambridge, Harvard University, and London Business School and holds or has held a number of visiting appointments at universities and central banks around the world.
NBER periodicals and newsletters are not copyrighted and may be reproduced freely with appropriate attribution.
Companies hire experts to make sense of the law and avoid over- or underpayment. Administrative costs are pushed up by the documentation needed to justify a tax position. This is particularly harmful to businesses that must incur artificial costs completely unrelated to their production and commercial activities.
Tax avoidance refers to all practices and schemes adopted by companies to reduce their tax burden legally. In spite of the bad press it draws, tax avoidance is a competitive necessity in a globalized world, where markets are no longer limited to domestic consumers and investors. Tax avoidance satisfies the corporate performance requirements of shareholders and creditors with respect to gains from dividends and interest.
This makes investors more receptive to management, which is then better able to undertake longer-term projects that build up capital, increase productivity and generate new production outlets. Labour remuneration and employment improve. This also means that shareholders will keep investing in the firm for a longer period, instead of selling their shares in a speculative move as soon as they make a capital gain.
Moreover, tax avoidance makes a company more competitive. Furthermore, the availability of greater capital reserves helps a company deal with hard times more effectively.
Tax avoidance does not involve all companies. Nor is it limited to large companies. Only the more mobile companies, in terms of either production or sales, usually those with much of their income coming from foreign markets, can expect to enjoy tax avoidance advantages beyond domestic tax shelters. Big multinationals benefit from large incomes that enable them to implement complex tax avoidance schemes involving parent and subsidiary companies abroad.
Very small companies can benefit from various domestic tax shelters and subsidies that are akin to tax avoidance. Only less mobile companies, unable to bear the vicissitudes of tax avoidance, must carry the full tax burden.
In any case, tax avoidance helps undo tax policies that rely on higher tax rates to increase government revenue. The higher the rates, the greater the tax compliance costs are and the greater the incentives to engage in tax avoidance.
Fighting tax avoidance through regulation may prove counterproductive to the government for five reasons. This increases tax compliance costs, which reinforces the incentive for tax avoidance or worse, fiscal exile. Third, any reaction against tax avoidance is met by growth in the tax avoidance lobby industry, funnelling company funds that would otherwise be used in production. Fourth, the increase in tax regulation entails growth in the tax specialist industry within large corporations and accounting firms, further diverting funds from productive use.
Finally, government risks losing revenue as tax avoidance rises or as tax-avoiding companies simply decide to leave their territory. Corporate taxation, particularly in France, is a drag on the economy.
High-taxing governments miss the point that wealth is generated within companies and that this wealth is continuously redistributed as remuneration to employees and to investors.
However, companies need capital to generate wealth, and this comes from investors. Corporate taxation penalises investors and later penalises employees too as companies invest less or leave the country. Companies are increasingly integrated into a global economy and are no longer limited to their original domestic markets.
In order to stay on course, France should at least harmonise its tax burden and regulatory complexity to the same level as the rest of the world. This would merely make France as competitive as its better-performing neighbours of similar size, such as Germany and the United Kingdom. This would not necessarily cause a decline in government revenues.
On the contrary, if corporate taxation is drastically reduced, so are tax compliance costs, resulting in a broadening of the tax base. Nothing would prevent it from working for France as well. Sources: European Central Bank and Eurostat. For the full profile on France and the description of the typical company see PricewaterhouseCoopers , Paying Taxes The Global Picture , pp.
Taxable corporate income in France refers to net earnings before tax. After that, it became Source: impots. Today all these gains are taxed under the personal income tax regime. The reader should not confuse capital accumulation with capital concentration. Jens Arnold, et al. Karel Mertens and Morten O. In short, the growth-inhibiting effect of taxes on sole proprietorships is a general and pervasive phenomenon. NBER periodicals and newsletters are not copyrighted and may be reproduced freely with appropriate attribution.
More in this issue. The Digest: No. Share Twitter LinkedIn Email. Also in this issue:. Peer Effects in the Classroom. Alan J. Auerbach, the Robert D.
0コメント