The Credit Channel of Capital Tax Policy

Authors


  • Holger Strulik, University of Hannover, Wirtschaftswissenschaftliche Fakultät, Königsworther Platz 1, 30167 Hannover, Germany (strulik@vwl.uni-hannover.de.).

  • I would like to thank Charles Carlstrom, Karl Dietrich, Michael Funke, Christian Groth, Ines Lindner, Christian Schumacher, and Nikolaus Siegfried, participants at seminars in Hannover and Copenhagen, and the World Congress of the Econometric Society 2005, and an anonymous referee for useful comments.

Abstract

A neoclassical growth model is augmented by a corporate sector, financial intermediation, and a set of tax rates. In this setting, capital structure is determined by the interplay between a tax advantage of debt finance and costly state verification entailed by asymmetric information. Effects of capital tax reforms are investigated with a special focus on this micro-founded credit channel of tax policy. The theoretical part of the paper establishes a new, institution-based view on the motivation of debt finance in general equilibrium and derives financial and real effects of private and corporate income tax policies. Using a calibration with U.S. data, the applied part demonstrates that tax cuts cause significant adjustments of capital structure. Nevertheless, it turns out that the credit channel generates relatively small effects of tax reforms on consumption, investment, and growth.

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