Personal taxation of capital income and the financial leverage of firms

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Abstract: Terms of use: Documents in EconStor mayTax competition for capital has led to a trend where many countries levy lower taxes on interest income, often introducing differential taxation between interest and business income. This study analyzes the effect on firm debt usage. We exploit Germany's 2009 tax reform, which introduced a final withholding tax on interest income with a flat rate 18 percentage points below the unchanged tax rate on income from unincorporated businesses, as a quasi-experiment. The results, based on firm level panel data, indicate that firms increase their leverage when the tax rate on interest income decreases, albeit to a small degree.

Top Tax Progression and Capital Taxation in Germany

“…One obvious shifting possibility is an increase in the leverage ratio of privately owned firms: for non-listed Norwegian firms Alstadsaeter and Fjaerli (2009) find strong timing effects of dividends prior to and a reduced leverage ratio after an increase in the tax rate on dividends. For the German withholding tax reform, Fossen and Simmler (2015) find that leverage at the unincorporated firm level increased in reaction to the decreased marginal tax rate on interest income, but only to a small degree. This comparatively small effect in Germany might be a consequence of restricted applicability of the reduced tax rate on interest income for loans between family members, firm owners and firm, and similar cases (see §32d EStG) as it impedes shifting from business profits (both incorporated and other) to interest income.…”

Investor taxation, firm heterogeneity and capital structure choice

“…To tackle the problem of the identification of the marginal owner when using investor level tax rates, several studies proxy for firm-specific ownership (Lin and Flannery 2013; Faccio and Xu 2015) or use data on observed ownership structures (Fossen and Simmler 2016; Babbel et al 2018). Similar to Babbel et al (2018), our dataset allows us to directly observe the composition of the firm-specific ownership structure and thus the marginal owner of the firm.…”

“…We use WhollyOwn, as Jiang et al (2017) have shown that firms that are controlled by one single owner have the lowest agency costs and thus the most effective ownership structure. Alternatively, we follow Fossen and Simmler (2016) and use MajOwn to control for the effect of taxes in the presence of a majority owner and we follow Pindado and de la Torre (2011) and Babbel et al (2018) who define the marginal owner of the firm as the largest owner LargeOwn .…”