Arbeitspapier

Differential taxation and firms' financial leverage: Evidence from the introduction of a flat tax on interest income

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Tax competition for the mobile factor capital has led to a trend in many countries to levy lower taxes on interest income, often introducing differential taxation between interest and business income. In this study, we analyze the effect of such differential taxation on the debt ratio of firms. We exploit a 2009 tax reform in Germany as a quasi-experiment, which introduced a flat final withholding tax and opened a gap of 18 percentage points between the tax rate on income from unincorporated businesses and the new lower tax rate on interest income. We apply a regression adjusted semi-parametric difference-in-difference matching strategy based on firm level panel data. In addition, we implement a more structural approach with a tax rate differential, taking into account its endogeneity by using instrumental variables. The results indicate that firms increase their leverage when the tax rate on interest income decreases, albeit to a small degree.

Language: Englisch

Bibliographic citation: Series: Diskussionsbeiträge ; No. 2012/4

Classification: Wirtschaft
Business Taxes and Subsidies including sales and value-added (VAT)
Personal Income and Other Nonbusiness Taxes and Subsidies; includes inheritance and gift taxes
Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

Subject: income taxation
capital taxation
financial structure
leverage
matching
Kapitalertragsteuer
Flat Tax
Unternehmensbesteuerung
Einkommensteuer
Steuerwirkung
Kapitalstruktur
Schätzung
Deutschland

Event: Geistige Schöpfung

(who): Fossen, Frank
Simmler, Martin

Event: Veröffentlichung

(who): Freie Universität Berlin, Fachbereich Wirtschaftswissenschaft

(where): Berlin

(when): 2012

Handle: http://hdl.handle.net/10419/56056

Last update: 10.03.2025, 11:42 AM CET

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Object type

Arbeitspapier

Associated

Fossen, Frank
Simmler, Martin
Freie Universität Berlin, Fachbereich Wirtschaftswissenschaft

Time of origin

2012

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