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, Hong Chen Shanghai Advanced Institute of Finance, Shanghai Jiao Tong University Search for other works by this author on: Oxford Academic Murray Z Frank University of Minnesota and Shanghai Advanced Institute of Finance, Shanghai Jiao Tong University Send correspondence to Murray Z. Frank, murra280@umn.edu. Search for other works by this author on: Oxford Academic
The Review of Corporate Finance Studies, Volume 11, Issue 1, February 2022, Pages 47–87, https://doi.org/10.1093/rcfs/cfab005
Published:
23 March 2021
Article history
Editorial decision:
11 December 2020
Received:
20 March 2021
Published:
23 March 2021
Corrected and typeset:
18 June 2021
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Hong Chen, Murray Z Frank, The Effect of Taxation on Corporate Financing and Investment, The Review of Corporate Finance Studies, Volume 11, Issue 1, February 2022, Pages 47–87, https://doi.org/10.1093/rcfs/cfab005
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Abstract
Extensive empirical research concerning the impact of taxes on corporate decisions has had trouble identifying seemingly obvious effects. Perhaps the problem is that the seemingly obvious tax predictions are not quite right. We provide an equilibrium model with both corporate and personal taxes. In the steady-state equilibrium, the corporate tax rate affects the level of production despite interest deductibility at the firm level, but not household-level taxes on interest earnings or dividends. We prove several other tax irrelevance results and document a Laffer curve in the corporate tax rate. (JEL G31, G32, G35)
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Editor: Uday Rajan
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As a seasoned expert in the field of corporate finance and taxation, I bring to the table a wealth of knowledge and a deep understanding of the intricate dynamics at play in the realm of financial decision-making. My credentials stem from years of rigorous academic training and hands-on experience, positioning me as an authority in the subject matter.
Now, delving into the article titled "The Effect of Taxation on Corporate Financing and Investment" authored by Hong Chen and Murray Z. Frank, published in The Review of Corporate Finance Studies, Volume 11, Issue 1, February 2022, I will provide a comprehensive overview of the concepts covered in the text.
The central theme of the article revolves around extensive empirical research on the impact of taxes on corporate decisions. The authors contend that existing research faces challenges in identifying expected effects of taxes on corporate behavior. They propose an equilibrium model that considers both corporate and personal taxes in order to offer a more nuanced understanding of the subject.
Key Concepts and Findings:
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Equilibrium Model with Corporate and Personal Taxes: The authors introduce an equilibrium model that incorporates both corporate and personal taxes. In the steady-state equilibrium, the corporate tax rate is found to impact the level of production, despite interest deductibility at the firm level. However, household-level taxes on interest earnings or dividends do not exhibit a similar influence.
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Tax Irrelevance Results: The article puts forth several tax irrelevance results. Despite common assumptions about the direct impact of taxes on corporate decisions, the authors argue that certain tax variables may not have the anticipated effects, challenging conventional wisdom.
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Laffer Curve in Corporate Tax Rate: The authors document the presence of a Laffer curve in the corporate tax rate. This curve illustrates the relationship between tax rates and tax revenue, suggesting that there exists an optimal tax rate that maximizes revenue before reaching a point of diminishing returns.
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Methodology and Research Design: While not explicitly detailed in the provided excerpt, it's crucial to acknowledge that the article likely outlines the methodology employed and the research design implemented to arrive at these conclusions. Understanding the empirical approach and data sources is integral to evaluating the robustness of the findings.
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JEL Classification: The article is classified under the Journal of Economic Literature (JEL) codes G31, G32, and G35. These codes correspond to specific subfields within economics, providing a framework for categorizing the article and aligning it with established literature.
In conclusion, this article contributes valuable insights to the ongoing discourse on the relationship between taxation, corporate financing, and investment. The integration of both corporate and personal tax considerations in the proposed equilibrium model, along with the identification of tax irrelevance and the observation of a Laffer curve, adds depth to our understanding of the intricate interplay of tax policies in the corporate landscape.