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Free keywords:
Financial structure, Debt ratio, Corporate income taxation, Corporate
tax return data, Microsimulation
Abstract:
To estimate the impact of profit taxation on the financial leverage of corporations,
this study uses a pseudopanel constructed from comprehensive corporate
tax return microdata for the period 1998–2001, which saw the introduction of major
corporate tax reform in Germany. Financial leverage refers to the ratio of long-term
debt to total capital. The endogeneity of the firm-specific marginal after-financing
corporate income tax rate is controlled for by an instrumental variable approach. The
instrument for the observed marginal tax rate is the counterfactual tax rate that a
corporation would have faced in a particular period had there been no endogenous
change, triggered by the tax reform, of its financial leverage and tax base. This counterfactual
tax rate is derived from a detailed microsimulation model of the corporate
sector, based on tax return microdata. The marginal tax rate has a statistically significant
and relatively large positive effect on corporate leverage; for firms reporting
positive profits, an increase of the marginal tax rate of 1 % would increase the financial
leverage by approximately 0.7 %, on average. The debt ratio is less responsive to
tax incentives for small corporations and firms facing high economic risks.
