Holger Strulik, University of Hannover, Wirtschaftswissenschaftliche Fakultät, Königsworther Platz 1, 30167 Hannover, Germany (email@example.com.).
The Credit Channel of Capital Tax Policy
Article first published online: 4 SEP 2008
© 2008 Wiley Periodicals, Inc.
Journal of Public Economic Theory
Volume 10, Issue 5, pages 717–742, October 2008
How to Cite
STRULIK, H. (2008), The Credit Channel of Capital Tax Policy. Journal of Public Economic Theory, 10: 717–742. doi: 10.1111/j.1467-9779.2008.00383.x
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.
- Issue published online: 4 SEP 2008
- Article first published online: 4 SEP 2008
- Received April 21, 2005; Accepted May 5, 2008.
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.