estimating the tax advantage of corporate debt this paper presents estimates of the effective tax value of incremental interest deductions for corporations taking into account that they may not be able to utilize all their interest deductions fully because of either insufficient taxable income or the availability of nondebt tax shields after describing particular features of the tax code which may drive a wedge between statutory and effective tax rates for debt finance we present estimates using the treasury corporate tax model of effective tax rates for a variety of industry groupings our estimates suggest that the after tax cost of debt varies widely across industries the magnitude of the effective tax advantage to debt finance has important implications for corporate financial behavior one issue which has been examined extensively in the corporate finance literature is whether the value of the firm is affected by the firm s leverage ratio in a recent contribution deangelo and masulis 3 have shown that financing decisions can affect the value of the firm if the effective tax advantage to debt finance varies among firms or is reduced by the presence of nondebt tax shields such as investment tax credits and depreciation deductions the effective tax advantage to debt is also an important determinant of leverage related costs gordon and malkiel 5 have recently used the statutory tax rate to estimate expected bankruptcy costs induced by the corporate tax when the firm is assumed to balance the marginal tax advantage to debt with marginal expected bankruptcy costs if however the effective tax rate for interest deductions falls short of the statutory rate the magnitude of these costs may be overstated this paper presents detailed estimates of the marginal effective tax advantage to debt finance our estimates based on data in the treasury 1978 corporate master statistical file and on simulations done with the treasury corporate tax model quantify the impact of increasing interest deductions without changing other items on the corporation s income statement 1 we simulate the impact of a change in a firm s capital structure holding its investment and production decisions constant this is an appropriate procedure for estimating the marginal

some nonlinear tax effects on asset values and investment decisions under uncertainty abstract tax system nonlinearities are often ignored but with uncertainty may have important implications for the magnitude and direction of tax effects this paper studies a particular nonlinear tax rule the policy subsidizes asset values but may discourage some investments and encourage earlier shutdown of some projects the marginal effective tax rate varies with project risk furthermore a corporate cash flow tax can encourage investment due to interactions with the nonlinear policy the paper also presents a general statement of the stochastic equilibrium valuation method which can be used to analyze other nonlinear taxes numerical examples demonstrate computational feasibility

the effects of tax convexity on default and investment decisions the objective of this article is to examine how default and investment triggers change under different levels of tax asymmetry when firms face nonlinear tax schedules under a convex tax schedule profits are taxed at a higher rate while losses are taxed or rebated at a lower rate thus reducing the risk shared by the government this article presents a dynamic model based on the contingent claims framework to explore the impacts of tax convexity on the triggers and we find that the impacts vary significantly depending on several countervailing forces tax convexity has a nonmonotonic relationship with both the default and investment triggers because of the government s risk sharing role the default trigger is higher when tax convexity increases while the growth option exerts a counteracting effect that lowers this trigger creating an ambiguity in the investment trigger when changing the level of tax asymmetry

deriving a flexible mixed demand system the normalized quadratic model this article deals with the specification of a locally flexible and theory consistent system of mixed demand functions a framework that allows for a rich set of possibilities about what is assumed as exogenous in a demand model a coherent mixed demand system is derived by using the restricted expenditure function typically studied in the related area of rationed demands the method is implemented by a new normalized quadratic nq parameterization of the restricted expenditure function the resulting nq mixed demand system is illustrated with an application to a nine good model of the italian demand for vegetables

real options agency conflicts and optimal capital structure abstract we examine the impact of a stockholder bondholder conflict over the timing of the exercise of an investment option on firm value and corporate financial policy we find that an equity maximizing firm exercises the option too early relative to a value maximizing strategy and we show how this problem can be characterized as one of overinvestment in risky investment projects equityholders incentive to overinvest significantly decreases firm value and optimal leverage and significantly increases the credit spread of risky debt numerical solutions illustrate how the agency cost of overinvestment and its effect on corporate financial policy vary with firm and project characteristics

social cost of environmental quality regulations a general equilibrium analysis the use of cost benefit analysis by federal regulatory agencies has expanded greatly in scope and sophistication unfortunately agencies continue to employ private cost rather than social cost to evaluate environmental quality regulations furthermore general equilibrium impacts and intertemporal effects of regulations are typically not included in the evaluation in this paper we estimate the social cost of environmental quality regulations mandated by the clean air and clean water acts we construct an econometric general equilibrium model of the united states to demonstrate that social cost estimates diverge sharply from private cost estimates we also demonstrate that general equilibrium impacts are significant and pervasive and that intertemporal effects of the regulations heretofore ignored are significant

heterogeneity in the effect of regulation on entrepreneurship and entry size we use cross national harmonized micro data from a broad sample of developed and developing countries and investigate the heterogeneity of the effect of entry contract enforcement regulation and financial development on both the decision to become an entrepreneur and the level of employment of newly created businesses we focus on the interaction between the level of regulation and financial development and some individual characteristics that are important determinants of entrepreneurship such as gender business skills and social networks we find that entry regulation moderates the effect of business skills while accentuating the effect of gender even after accounting for the level of financial development specifically women are more likely to enter into entrepreneurship in countries with higher levels of entry regulation but mainly because they cannot find better work this effect is also more pronounced in countries that are less financially developed furthermore individuals who report having business skills are less likely to enter entrepreneurship in countries with higher entry regulation finally we also find that individuals who know other entrepreneurs are less likely to start large businesses in countries with higher levels of entry and contract enforcement regulation jel k23 l26 l51

regulation and rent seeking prices profits and third party transfers previous research formulated the regulatory process as a contest between consumer and producer groups to determine the regulated price empirical verification of this result has been provided by numerous studies modeling the regulatory process in this fashion results in a rent seeking game in which property rights granted in the original legislation are not exclusively assigned to one group and as a result rent seeking ensues on the relevant margin this study has addressed the issue of third party interest groups extracting transfer payments from the regulatory process by introducing third party interests as an argument in the regulator s majority function it was mathematically demonstrated and empirically verified that a higher regulated price can be expected this finding suggests that other opportunities exist for an enriched theory of regulatory behavior where the political context in which the regulator functions is more precisely defined and extended

the interaction of debt financing cash grants and the optimal investment policy under uncertainty abstract significant progress has been made toward understanding a levered firm s optimal investment policy under uncertainty to date however not much work has concentrated on the time scale trade off and collectively held real options we employ a game theoretic real option model between a firm and a government to analyze the effect of uncertainty and investment stimulus in the form of cash grants on optimal investment timing financing and investment scaling we find that the jointly held real option between the firm and the government leads to underinvestment regardless of whether the firm has the possibility to issue debt subsidies however reduce the level of underinvestment notably the results indicate that even though levered firms receive less support they invest more than unlevered firms this challenges recent findings that a firm s optimal investment level is not affected by the way it finances a project similarly we find that for realistic parameter constellations the levered firm s optimal investment threshold can be higher than that of its unlevered counterpart this indicates that the availability of tax shield benefits does not necessarily serve as an incentive to invest earlier finally we show that the effect of cash flow uncertainty on the equilibrium level of grants is ambiguous and triggers the switch from a subsidy to non subsidy regime

regulation and growth why some countries grow faster than others is one of the most important questions in economics solving this puzzle has the obvious appeal of improving the living standards for a significant proportion of the world population we go further towards answering this question by studying a major determinant of growth regulations governing business activity our results also have significant implications for policy they suggest that countries should put priority on reforming their business regulations when designing growth policies measures of institutions currently used in the growth literature indicate the extent of problems but not how to resolve them by contrast the indicators in the doing business database are directly linked to specific reforms for example the procedures to register a business or property can be cut by combining them at a one stop shop for businesses establishing a credit bureau or reducing mandated severance pay for workers will also improve performance on the business regulations index our findings imply that identifying and implementing such reforms can accelerate economic growth

corporate taxation and the size of new firms evidence from europe using a novel country industry level panel database with information on newly incorporated firms in 17 european countries between 1997 and 2004 we study how taxation of corporate income affects the size of entrants at the country industry level our results that are robust to changes in several assumptions suggest that a reduction in the effective corporate income tax rate leads to a significant reduction of the capital size of entrants and to a decrease in their capital labor ratio

can tax convexity be ignored in corporate financing decisions abstract the standard modeling practice in corporate finance has been to assume a linear tax schedule this paper extends the structural contingent claim model of corporate finance to incorporate a more realistic convex tax schedule it is shown that tax convexity raises the optimal default boundary and thus increases the likelihood of default and also reduces the optimal leverage ratio while the former effect seems insignificant in general the effect of tax convexity on the optimal leverage ratio can be quantitatively significant we conclude that tax convexity should not be ignored in corporate financing decisions and theoretical models should use a convex tax schedule instead of a linear one thus the short answer to the question in the title is no

how do federal regulations affect consumer prices an analysis of the regressive effects of regulation this study is the first to measure the impact of federal regulations on consumer prices by combining consumer expenditure and pricing data from the bureau of labor statistics industry supply chain data from the bureau of economic analysis and industry specific regulation information from the mercatus center s regdata database we determine that regulations promote higher consumer prices and that these price increases have a disproportionately negative effect on low income households specifically we find that the poorest households spend larger proportions of their incomes on heavily regulated goods and services prone to sharp price increases while the literature explores other specific costs of regulation noting that higher consumer prices are a probable consequence of heavy regulation this study is the first to provide a thorough empirical analysis of that relationship across industries irrespective of the reasons for imposing new regulations these results demonstrate that in the aggregate the negative consequences are significant especially for the most vulnerable households

on the debt capacity of growth options we relate the value of growth options in the firm s investment opportunity set to the level of debt in the firm s capital structure underinestment costs of debt increase and free cash flow benefits fall with additional growth options thus if debt capacity is defined as the amount of debt the firm optimally adds for an incremental project then the debt capacity of growth options is negative this result implies that book leverage should fall with the addition of growth options our tests using a large sample of industrial firms confirm this prediction

on the existence of an optimal capital structure theory and evidence one of the most contentious issues in the theory of finance during the past quarter century has been the theory of capital structure the geneses of this controversy were the seminal contributions by modigliani and miller 18 19 the general academic view by the mid 1970s although not a consensus was that the optimal capital structure involves balancing the tax advantage of debt against the present value of bankruptcy costs no sooner did this general view become prevalent in the profession than miller 16 presented a new challenge by showing that under certain conditions the tax advantage of debt financing at the firm level is exactly offset by the tax disadvantage of debt at the personal level since then there has developed a burgeoning theoretical literature attempting to reconcile miller s model with the balancing theory of optimal capital structure e g deangelo and masulis 5 kim 12 and modigliani 17 the general result of this work is that if there are significant leverage related costs such as bankruptcy costs agency costs of debt and loss of non debt tax shields and if the income from equity is untaxed then the marginal bondholder s tax rate will be less than the corporate rate and there will be a positive net tax advantage to corporate debt financing the firm s optimal capital structure will involve the trade off between the tax advantage of debt and various leverage related costs the upshot of these extensions of miller s model is the recognition that the existence of an optimal capital structure is essentially an empirical issue as to whether or not the various leverage related costs are economically significant enough to influence the costs of corporate borrowing the miller model and its theoretical extensions have inspired several timeseries studies which provide evidence on the existence of leverage related costs trczinka 28 reports that from examining differences in average yields between taxable corporate bonds and tax exempt municipal bonds one cannot reject the miller hypothesis that the marginal bondholder s tax rate is not different from the corporate tax rate however trczinka is careful to point out that this finding does not necessarily imply that there is no tax advantage of corporate debt if the personal tax rate on equity is positive indeed buser and hess 1 using a longer time series of data and more sophisticated econometric techniques estimate that the average effective personal tax rate on equity is statistically positive and is not of a trivial magnitude more importantly they document evidence that is consistent with the existence of significant leverage related costs in the economy

what is challenging renewable energy entrepreneurs in developing countries this paper cumulates the findings from a review of the challenges faced by renewable energy entrepreneurs in developing countries to date research that could facilitate the success of renewable energy entrepreneurs in the world s developing regions has been fragmented across two main bodies of literature management specifically entrepreneurship and renewable energy by conducting a qualitative review of the extant literature i propose that the findings from both bodies of research may be distilled to six 6 key challenges inadequate access to institutional finance the price of renewable energy technologies rets the lack of skilled labour underdeveloped physical infrastructure and logistics power dominance of incumbents inadequate government or policy support through this research i not only advance a unified conceptualisation of the challenges faced by renewable energy entrepreneurs in developing countries but also highlight a number of the revealed opportunities for future research

who pays for industrial pollution abatement the distributional impact of industrial pollution abatement is measured for the years 1973 and 1977 the findings indicate that in 1977 1 09 of income or 0 510 of personal consumption expenditures of the lowest income class paid indirectly for abatement costs implicit in purchased goods for the highest income class the corresponding figures were 0 218 and 0 423 respectively in addition abatement costs per dollar of output are presented for representative industries

evaluating the impact of reforming the food subsidy program in egypt a mixed demand approach abstract food subsidy is one of the policies considered to protect consumer welfare against food price increases in particular when the insufficient local production has to be complemented by food imports with volatile prices egypt has experienced several food crises the latest in 2008 which put an halt to attempts to reform in depth the system of food subsidies because of social unrest in this paper we use a mixed demand approach to analyze the consumption structure of egyptian households our model specification takes into consideration the characteristics of the egyptian food subsidy system where some food items have predetermined quotas while others are associated with predetermined subsidized prices price income and quota elasticities are estimated from the egyptian family expenditure survey and welfare change measures are derived by income class simulations of various options to eliminate subsidies on selected food items are conducted we estimate the negative welfare impact of the reforms especially in the context of increasing food prices by comparing welfare effects of policy options by income quartiles and by household category rural urban

zipf s law and maximum sustainable growth abstract zipf s law states that the number of firms with size greater than s is inversely proportional to s most explanations start with gibrat s rule of proportional growth but require additional constraints we show that gibrat s rule at all firm levels yields zipf s law under a balance condition between the effective growth rate of incumbent firms which includes their possible demise and the growth rate of investments in entrant firms under the additional assumption that firms do not consume more resources than available we show that zipf s law is the signature that firms grow at the maximum reachable long term rate

asset sale debt restructuring and liquidation this paper considers a dynamic model in which shareholders of a firm in distress have a choice of whether the firm proceeds to debt restructuring or direct liquidation at an arbitrary time in the model we show the following results fewer asset sales lower financing debt renegotiation and running costs a lower premium to the debt holders a lower cash flow volatility and a higher initial coupon increase the shareholders incentive to choose debt restructuring to avoid full liquidation in the debt renegotiation process the shareholders arrange the coupon reduction and use equity financing to retire a part of the debt value to the debt holders the timing of debt restructuring always coincides with that of liquidation without debt renegotiation most notably the shareholders do not prefer asset sale in debt restructuring even if they face high financing costs the possibility of debt renegotiation in the future increases the initial leverage ratio in the optimal capital structure

on perfect rent dissipation if economists are united on anything it is the proposition that monopoly prices reduce economic welfare by preventing the realization of the maximum gains from trade in any market the extent of such distortions to efficiency are often called harberger costs after arnold harberger s 1954 provocative attempt to measure the extent of these losses in the u s economy more recent analysis has revealed that when monopoly power is achieved via regulation at least part of the monopoly rents so gained will not be simple transfers from consumers to producers but will be dissipated by producers rent seeking activity since such activity employs real resources there are additional costs to monopolization beyond the harberger costs as emphasized by gordon tullock 1967 and richard posner 1975 indeed posner and others have argued that if competition for the monopoly rents is perfect all of the expected rents from regulation will be converted to welfare losses while franklin fisher s 1985 comment has qualified this conclusion somewhat the upshot of the debate is that the rent seeking or tullock costs may greatly exceed the harberger costs 1 another recent strand of the analysis concerns the time pattern over which monopoly returns are dissipated by competition to gain and hold the monopoly right robert mccormick et al 1984 emphasize that to the extent such expenditures are sunk they are forever lost and not recoverable by deregulation while conceding the point martin cherkes et al 1986 argue that most rentseeking expenditures are recurring not sunk and therefore large gains from deregulation remain the purpose of this essay is to point out that recurring or sunk even the largest specification of the harberger and tullock costs of regulatory monopolization may fall far short of the actual welfare costs this is because the analysis concentrates on the rent seeking tullock costs and largely ignores the parallel rent defending2 tullock costs a proper assessment of such rent defending tullock costs might more than double the maximum welfare costs of regulation suggested by posner

are co2 taxes regressive evidence from the danish experience abstract denmark today carries one of the heaviest environmental tax burdens in the world bringing in around 10 of public revenues while evaluations have shown that the danish co 2 and other environmental taxes work as an effective measure to reduce emissions a considerable barrier to increased use of these instruments today seems to be a widespread perception of their socially adverse effects in this article it is demonstrated that co 2 taxes imposed on energy consumption in households as well as in industry do in fact tend to be regressive and therefore have undesirable distributional effects this holds especially for taxes imposed directly on households to analyze this we apply national consumer survey statistics in combination with input output tables

social protection in contexts of fragility and forced displacement introduction to a special issue effective social protection is increasingly as essential to supporting affected populations in situations of protracted instability and displacement despite the growing use of social protection in

taxes and capital structure evidence from firms response to the tax reform act of 1986 while the theoretical relation between taxes and capital structure has been extensively analyzed the empirical evidence on this issue has thus far been inconclusive one of the main difficulties confronting previous empirical studies of the cross sectional relationship between taxes and leverage was the control of intervening variables the tax reform act of 1986 tra which drastically changed the tax regime provides a unique opportunity to assess the interaction between taxes and leverage decisions in a controlled environment the authors test the relationship between leverage and certain tax related variables for a large sample of companies in the years surrounding the enactment of tra the results support the tax based theories of capital structure the findings indicate that there exists a substitution effect between debt and nondebt tax shields and that both corporate and personal tax rates affect leverage decisions coauthors are dan givoly aharon r ofer and oded sarig article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

regulation and productivity performance the paper reviews theory and evidence on the ways in which regulation affects productivity outcomes in a context of endogenous growth it is argued that traditional measures of compliance costs miss the potentially most important impacts of regulation on productivity which occur through changes in incentives to invest and to innovate recent attempts to measure cross country variations in the strength of product market and employment regulation are considered and some weaknesses are highlighted nevertheless consistent with endogenous growth models there appears to he quite strong evidence that regulations which inhibit entry into product markets have an adverse effect on tfp growth in oecd countries although there are some discrepancies in the evidence on most measures the uk appears lightly regulated relative to france and germany and this may have contributed to a reduction in the recent past in the uk s tfp gap

red tape and delayed entry does cutting red tape foster entrepreneurship in industries with the potential to expand we address this question by combining the time needed to comply with government entry procedures in 45 countries with industry level data on employment growth and growth in the number of establishments during the 1980s our main empirical finding is that countries where it takes less time to register new businesses have seen more entry in industries that experienced expansionary global demand and technology shifts our estimates take into account that proxying global industry shifts using data from only one country or group of countries with similar entry regulations will in general yield biased results

tax incentives to hedge for corporations facing tax function convexity hedging lowers expected tax liabilities thereby providing an incentive to hedge we use simulation methods to investigate convexity induced by tax code provisions on average the tax function is convex although in approximately 25 percent of cases it is concave carrybacks and carryforwards increase the range of income with incentives to hedge other tax code provisions have minor impacts among firms facing convex tax functions average tax savings from a five percent reduction in the volatility of taxable income are about 5 4 percent of expected tax liabilities in extreme cases these savings exceed 40 percent if a firm faces a convex tax function then hedging that reduces the volatility of taxable income reduces the firm s expected tax liability for a firm facing some form of tax progressivity when taxable income is low its effective marginal tax rate will be low but when income is high its tax rate will be high if such a firm hedges the tax increase in circumstances where income would have been low is smaller than the tax reduction in circumstances where income would have been high thus lowering expected taxes in examining the importance of various motives to hedge researchers have employed two general methods survey and regression analysis there are potential problems with each for example some managers might view the information requested in a survey as proprietary or might hesitate to admit that they employ derivatives to speculate rather than hedge to employ regression methods researchers must generate proxies for tax status in addition to other firm characteristics to the extent that a tax variable e g whether the firm has a net operating loss carryforward proxies for factors such as financial distress as well as tax circumstances analysts face an identification problem in interpreting the results

the capital structure puzzle revisited corporate finance researchers have long been puzzled by low corporate debt ratios given debt s corporate tax advantage this article recognizes that firm value typically reflects a growing stream of earnings while current debt reflects a nongrowing stream of interest payments debt to value is therefore a distorted measure of corporate tax shielding even with very small debt related costs this may explain the observed magnitude and cross sectional variation of debt ratios since this variation may be independent of tax shielding debt ratios provide an inappropriate framework for empirically examining the trade off theory of capital structure article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

estimating the welfare costs of reforming the iraq public distribution system a mixed demand approach the iraqi public distribution system is the largest universal in kind subsidy system in the world in 2012 the public distribution system transfers accounted for as much as 30 percent of incomes of the poorest 10 percent of the iraqi population and provided 70 percent of the calories of the poorest 40 percent in effect the public distribution system remains the only safety net program that covers all the poor and vulnerable in the country yet it is a very inefficient and expensive means to deliver transfers to the poor and creates distortions in the economy as well as an unsustainable fiscal burden the fiscal crisis since mid 2014 has put reform of the public distribution system back on the agenda this paper employs a mixed demand approach to analyze the consumption patterns of iraqi households and quantify the welfare impact of a potential reform of the public distribution system in urban areas the results show that household consumption of public distribution system items is relatively inelastic to changes in price consumption is more inelastic for the poorest quintiles and for much of the population these goods are not inferior but rather normal goods cross sectional comparisons suggest that with improvements in welfare levels and with well functioning markets some segments of the population are substituting away from the public distribution system and increasing their consumption of market substitutes the removal of all subsidies will require compensating poor households by 74 4 percent of their expenditures compared with nearly 40 percent for the richest households in urban areas

food subsidies in egypt reform options distribution and welfare abstract egypt s food subsidies in 1996 97 5 5 percent of government expenditures cover rationed cooking oil and sugar 23 percent of subsidy cost and unrationed bread and flour 77 percent the subsidies enhance food security but are nontargeted and have substantial leakages this paper uses a computable general equilibrium cge model to simulate the short run effects of alternative food subsidy scenarios government savings from reduced spending finance uniform cuts in direct tax rates across all household types the model uses a 1996 97 database with detailed household information the targeting of cooking oil and sugar subsidies to the needy the bottom two quintiles in rural and urban areas has a progressive effect while elimination of this subsidy is regressive disaggregated household consumption changes are small 0 3 percent the targeting of all food subsidies is pro needy partly due to important indirect effects the consumption of the needy increases by 0 5 percent with little change for the nonneedy food subsidy elimination is regressive the needy suffer a consumption loss of 1 1 percent if the government savings instead are transferred to the needy the impact is reversed consumption increases by 4 2 percent for needy households while the nonneedy register a small loss the overall policy implication is that food subsidy reform can benefit the needy with at worst only a modest negative impact on the nonneedy if the subsidy is entirely eliminated targeted government programs would be necessary to protect the needy from the negative impact