the effective tax rate and the pretax rate of return abstract this paper presents new estimates of the taxes paid on nonfinancial corporate capital on the pretax rate of return to capital and on the effective tax rate the basic time series show that both the pretax rate of return and the effective tax rate have varied substantially in the past quarter century an explicit analysis indicates that after adjusting for different aspects of the business cycle pretax profitability was between one and 1 5 percentage points lower in the 1970s than in the 1960s the rate of profitability in the 1960s was also about one half of a percentage point greater than the profitability in the 7 years of the 1950s after the korean war changes in productivity growth in inflation in relative unit labor costs and in other variables are all associated with changes in profitability none of these variables however can explain the differences in profitability between the 1950s 1960s and 1970s looking at broad decade averages the effective tax rate and the pretax rate of return move in opposite directions lower pretax profits occuring when the tax rate is high there thus appears to have been no tendency for pretax profits to vary in a way that offsets differences in effective tax rates

debt leases taxes and the endogeneity of corporate tax status we provide evidence that corporate tax status is endogenous to financing decisions which induces a spurious relation between measures of financial policy and many commonly used tax proxies using a forward looking estimate of before financing corporate marginal tax rates we document a negative relation between operating leases and tax rates and a positive relation between debt levels and tax rates this is the first unambiguous evidence supporting the hypothesis that low tax rate firms lease more and have lower debt levels than high tax rate firms many theories of capital structure imply that all else equal the incentive to use debt financing increases with a firm s marginal tax rate due to the tax deductibility of interest expense e g modigliani and miller 1963 deangelo and masulis 1980 conversely leasing models generally predict that firms with low marginal tax rates employ relatively more leases than do firms with high marginal tax rates the logic behind the leasinlg prediction is that leases allow for the transfer of tax shields from firms that cannot fully utilize the associated tax deduction lessees to firms that can lessors e g myers dill and bautista 1976 smith and wakeman 1985 ross westerfield and jaffe 1996 despite these straightforward predictions empirically testing for tax effects is difficult because a spurious relation exists between the financing decision and many commonly used tax proxies specifically both interest expense and lease payments are tax deductible thus a firm that finances its operations with debt or leases reduces its taxable income potentially lowering its expected marginal tax rate if not properly addressed this endogeneity of the tax rate can bias an experiment in favor of finding a negative

on the role of small models in macrodynamics abstract this paper focuses on the role of small models in macrodynamics it discusses the insights that i believe these models offer and the extent to which they can address some of the complex issues such as heterogeneity and interactions among agents that are receiving increasing attention in the literature i comment on what i view to be the most productive role for numerical simulations and finally offer some brief comments in defense of the state of modern macroeconomic theory in light of the criticism it has received as a result of the recent financial crisis

inflation and reputation in many macroeconomic models with rational expectations optimal policy is time inconsistent and therefore announced policy may not be credible this paper models the government s credibility explicitly using kreps and wilson s analysis time consistent optimal government policy emerges as a sequential equilibrium in a repeated game this policy is at least as good as the inconsistent optimal policy and dominates the consistent policy when reputational effects are ignored thus the analysis resolves the problem of specifying a credible optimal policy in such models the results show why attempts to disinflate may lead to recession even with perfectly flexible prices this abstract was borrowed from another version of this item

capital structure choice and company taxation a meta study this paper provides a quantitative review of the empirical literature on the tax impact on corporate debt financing synthesizing the evidence from 46 previous studies we find that this impact is substantial in particular the tax rate proxy determines the outcome of primary analyses measures like the simulated marginal tax rate graham 1996a avoid a downward bias in estimates for the debt response to tax moreover debt characteristics econometric specifications and the set of control variables affect tax effects accounting for misspecification biases by means of meta regressions we predict a marginal tax effect on the debt ratio of 0 3

stabilization theory and policy 50 years after the phillips curve this paper discusses the impact of a w h phillips seminal work in macroeconomic stabilization policy on subsequent developments in that field we begin by reviewing the various stabilization rules adopted by phillips and show how these relate to optimal stabilization rules that emerge from linear quadratic optimization problems most of the early st abilization literature was associated with backward looking variables the development of rational expectations in the 1960 s and 1970 s posed a challenge for stabilization policy this arose from the role of forward looking inflationary expectations in the phillips curve and the effect this had on the design of optimal stabilization rules through issues such as the lucas critique and the time consistency of policy we also briefly comment on a long standing debate pertaining to the merits of fixed policy rules versus discretionary or optimal policy the latter part of the paper discusses some of the more contemporary aspects of stabilization policy thereby serving to illustrate the durability of phillips contributions

structural and market predictors of corporate labor relations strategies the authors develop a model predicting which of three broad labor relations strategies union avoidance union management collaboration or a mixed strategy combining elements of union avoidance and

the optimal intertemporal choice of inflation and unemployment an analysis of the steady state and transitional dynamics abstract this paper analyzes the optimal intertemporal choice of inflation and unemployment rates in two versions of a simple dynamic macro model in the first of these the real wage remains fixed while in the second the real wage is permitted to adjust endogenously the implications for the long run as well as the transitional dynamic adjustment paths are discussed in detail in the long run the optimal policy will drive the economy to its natural rate of unemployment accompanied by a steady rate of inflation which can be described in terms of a number of parameters characterizing the economy and the preferences of the policy maker the transitional dynamic adjustment path also depends upon these parameters among which the rate of time discount is particularly important

do taxes affect corporate debt policy evidence from us corporate tax return data abstract this paper uses u s statistics of income soi corporate income tax returns balance sheet data on all corporations to estimate the effects of changes in corporate tax rates on the debt policies of firms of different sizes small firms face very different tax rates than larger firms and relative tax rates have also changed frequently over time providing substantial information to identify tax effects the results suggest that taxes have had a strong and statistically significant effect on debt levels for example cutting the corporate tax rate by ten percentage points e g from 46 to 36 holding personal tax rates fixed is forecast to reduce the fraction of assets financed with debt by around 3 5 since small firms normally rely much more heavily on debt finance yet face much lower tax incentives to use debt the estimated effect of taxes would be strongly biased downwards without controls for firm size

stochastic control for economic models past present and the paths ahead abstract on the 30th anniversary of a meeting between engineers and economists at princeton university to discuss the potential application of stochastic control methods to economics this paper provides a review of past present and paths ahead the events surrounding some of the key developments of the past are described along with a discussion of the present state of the research and of paths for future research the paper is structured around the primary methods for solving quadratic linear economic stochastic control models namely open loop classical control handcrafted feedback rules optimal feedback min max control optimal feedback rules with parameter uncertainty and dual control the paper also includes a discussion of software developments in economic stochastic control modeling

taxation and capital structure choice evidence from a panel of german multinationals this paper analyzes the impact of taxes and lending conditions on the financial structure of multinationals foreign affiliates the empirical analysis employs a large panel of affiliates of german multinationals in 26 countries in the period from 1996 until 2003 in accordance with the theoretical predictions the effect of local taxes on leverage is positive for both types of debt moreover while adverse local credit market conditions are found to reduce external borrowing internal debt is increasing supporting the view that the two channels of debt finance are substitutes

caution and probing in a macroeconomic model abstract this paper reports on the application of an adaptive dual control technique to a small macroeconometric model of the u s economy both monetary and fiscal policy variables are used in the model the experiments find that probing and active learning will occur in small macroeconometric models but that unrealistically high terminal period penalties on state deviations are required before it appears

debt and the marginal tax rate abstract do taxes affect corporate debt policy this paper tests whether the incremental use of debt is positively related to simulated firm specific marginal tax rates that account for net operating losses investment tax credits and the alternative minimum tax the simulated marginal tax rates exhibit substantial variation due to the dynamics of the tax code tax regime shifts business cycle effects and the progressive nature of the statutory tax schedule using annual data from more than 10 000 firms for the years 1980 1992 i provide evidence which indicates that high tax rate firms issue more debt than their low tax rate counterparts

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

corporate taxation debt financing and foreign plant ownership this paper compares domestically and foreign owned plants with respect to their debt to assets ratio and analyzes to which extent the difference is systematically affected by corporate taxation to derive hypotheses about influence of corporate taxation on a firm s debt financing we adapt a standard model of taxation and financing decisions of firms for the case of international debt shifting activities of foreign owned firms we estimate the average difference between a foreign owned and a domestically owned firm s debt ratio treating the mode of ownership as endogenous using data from 32 067 european firms we find that foreign owned firms on average exhibit a significantly higher debt ratio than their domestically owned counterparts in the host country moreover this gap in the debt ratio increases with the host country s statutory corporate tax rate

price level determinacy with an interest rate policy rule and rational expectations abstract this paper reconsiders a result obtained by sargent and wallace namely that price level indeterminacy obtains in their model if the monetary authorities adopt a feedback rule for the interest rate rather than the money stock it is shown that the indeterminacy vanishes if the interest rate rule is chosen so as to have a desired effect on the expected quantity of money demanded this holds even if considerable weight is given in the choice of a rule to the aim of smoothing interest rate fluctuations

optimal monetary policy in an open economy this paper analyzes the optimal intertemporal tradeoff between inflation and output in an open economy under perfect foresight the announcement of the optimal plan may or may not generate an initial jump in the exchange rate that depends upon the real adjustment costs which such unanticipated changes impose on the economy in the case that such jumps occur the question of time consistency of the optimal policy arises a time consistent solution is obtained provided i the policy maker is not too myopic ii the adjustment costs associated with the jump in the exchange rate are of an appropriate form the optimal monetary rule is derived and properties of this rule as well as the overall optimal adjustment of the economy are discussed

corporate tax elasticities a reader s guide to empirical findings corporate taxes exert a variety of effects on business behaviour a wealth of empirical evidence assesses the magnitude of these behavioural margins of taxation this article offers an up to date review and aims to provide common ground by computing for each distortion the semi elasticity of the corporate tax base we pay particular attention to international investment where it is not a priory clear whether marginal investment decisions or discrete locations are most important using anextension of the meta analysis of de mooij and ederveen 2003 we explore the extent to which existing studies reveal differences in effect size between the intensive and extensive margins of international investment

financial sector debt bias abstract most tax systems create a tax bias toward debt finance such debt bias increases firm leverage and may negatively affect financial stability this paper presents novel evidence on debt bias in the non traditional financial sector i e investment banks and non bank financial intermediaries such as finance and insurance companies it also shows how debt bias in the financial sector has been affected by the global financial crisis the paper finds debt bias to be pervasive explaining as much as 10 percentage points of bank leverage these effects are more pronounced before than after the global financial crisis explained by the post crisis focus on rebuilding buffers going forward as buffers have largely been rebuilt debt bias is once again gaining prominence as a key driver of leverage decisions of financial firms underscoring the importance of policy reform at this juncture

new keynesian economics and the phillips curve models with sticky prices are an important part of new keynesian economics the author shows that several of the new keynesian models imply a formulation that is similar to the expectations augmented phillips curve of milton friedman and edmund phelps he then presents new estimates of the new keynesian phillips curve the author uses two proxies for price expectations survey based measures and an econometric based measure originally developed by bennett mccallum 1976 overall the results are consistent with the model but the survey based results are more precise suggesting that the surveys may be better measures of actual expectations copyright 1995 by ohio state university press

tax distortions to the choice of organizational form income from corporate and noncorporate firms is treated very differently under the tax law in theory given existing tax law the noncorporate sector should consist of very profitable firms owned by low tax bracket investors and firms with tax losses owned by high tax bracket investors but the degree to which firms change their form of organization in response to taxes and the resulting excess burden depends as well on nontax factors given the role of taxes we estimate what size the nontax advantage to incorporating must take in each industry so that the forecasted choices for organizational form aggregated over investors in different tax brackets are consistent with the aggregate evidence while the estimated nontax costs are large in some industries noncorporate activity tends to be concentrated where the costs are small leading to little excess burden from the tax distortion to organizational form

anticipated tax reforms and temporary tax cuts a general equilibrium analysis macroeconomic studies of tax policy in dynamic general equilibrium usually assume that reforms hit the economy unexpectedly and last forever here we explore how previous results change when we allow policy changes to be pre announced and of finite duration and when these facts are anticipated by households and firms quantitatively we demonstrate a headstart advantage from pre announcement that is never caught up by a surprising reform the welfare gain stemming from a 5 year announcement phase of a corporate tax cut for example is estimated to be around 10 percent of the total gain from the reform we show that impulse responses of important variables like firm value dividends and investment differ qualitatively depending on whether the reform comes expected or not we are also able to demonstrate a genuine welfare gain from temporary tax cuts impulse responses generated by our numerical method can be retraced by phase diagram analysis which facilitates explanation and interpretation of the produced results

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

capital tax reform corporate finance and economic growth and welfare abstract recent empirical studies have revealed a strong impact of tax changes on corporate finance yet models of economic growth usually neglect financial structure of the representative firm in order to investigate whether the consideration of firm finance modifies the estimated outcome of capital tax reforms a corporate sector is introduced in three popular models of economic growth the paper explores analytically the impact of taxation on structures of finance and production and gives a quantitative reassessment of growth and welfare effects of tax reforms in the u s economy a general result is that standard models of exogenous and endogenous growth overestimate the growth effect and underestimate the welfare gain from tax reform

laffer strikes again dynamic scoring of capital taxes abstract we set up a neoclassical growth model extended by a corporate sector an investment and finance decision of firms and a set of taxes on capital income we provide analytical dynamic scoring of taxes on corporate income dividends capital gains other private capital income and depreciation allowances and identify the intricate ways through which capital taxation affects tax revenue in general equilibrium we then calibrate the model for the us and explore quantitatively the revenue effects from capital taxation we take adjustment dynamics after a tax change explicitly into account and compare with steady state effects we find among other results a self financing degree of corporate tax cuts of about 70 90 and a very flat laffer curve for all capital taxes as well as for tax depreciation allowances results are strongest for the tax on capital gains the model predicts for the us that total tax revenue increases by about 0 3 1 2 after abolishment of the tax

why is the corporate tax rate lower than the personal tax rate in many oecd countries statutory corporate tax rates are lower than personal income tax rates this tax rate difference is often particularly large for small firms the present paper argues that a reduction of the corporate tax rate below the personal tax rate is an optimal tax policy if there are problems of asymmetric information between investors and firms in the capital market the reduction of the corporate tax rate below the personal tax rate encourages equity financing and thus mitigates the excessive use of debt financing induced by asymmetric information our main theoretical result stands in marked contrast to the traditional view of corporate taxation and corporate finance theory according to which there is a tax disadvantage to equity financing more recent empirical evidence on this issue however is in line with our result

mitigation of the lucas critique with stochastic control methods abstract lucas in brunner k meltzer a h eds the phillips curve and the labor markets supplementary series to the journal of monetary economics 1976 pp 19 46 pointed out that when optimization is performed on a deterministic macro model the resulting policy may not reflect the true optimal solution private agents may react to announced policies and consequently model parameters will start to drift the aim of this paper is to develop a methodology for deriving an optimal policy in the presence of rational expectations and parameter drift this drift is captured by a stochastic optimization framework with time varying parameters the resulting optimal policy is capable of tracking changes in the parameters due to policy changes a numerical example illustrates how the methodology provides a way to mitigate the effects of the lucas critique

explaining the decline in the offer rate of employer retirement plans between 2003 and 2012 workplace retirement plans deferred compensation plans dcs and deferred benefit plans dbs help workers save for retirement conveniently consistently and automatically but the percentage of

the information content of the interest rate and optimal monetary policy optimal monetary policy rules are derived in a rational expectations cum contracting framework monetary policy is redundant if wage setters exploit the incomplete current information embodied in today s nominal interest rate however the monetary authorities can save wage setters the costs of indexing to the interest rate a contemporaneous money supply feedback rule is as effective as wage indexation a lagged rule relevant under a regime of money supply targeting is also as effective if investors use the interest rate both rules have the same implications for the real interest rate as poole s combination policy however the two rules have strikingly different implications for the nominal interest rate

corporate tax incentives and capital structure new evidence from uk firm level tax returns abstract we investigate how companies capital structure is affected by corporate income taxes using confidential company level tax returns for a large sample of uk firms exploiting variation in companies marginal tax rates we find a positive and substantial long run tax effect on leverage leverage responds more to decreases in the marginal tax rate and it responds to changes in the marginal rather than the average tax rate most importantly we find that the marginal tax rate based on tax returns has greater explanatory power for companies leverage than the marginal tax rate based on financial statements our study suggests that errors in the measurement for tax incentives using financial statements could lead to underestimation of the tax effects on capital structure

cluster sample methods in applied econometrics inference methods that recognize the clustering of individual observations have been available for more than 25 years brent moulton 1990 caught the attention of economists when he demonstrated the serious biases that can result in estimating the effects of aggregate explanatory variables on individual specific response variables the source of the downward bias in the usual ordinary least squares ols standard errors is the presence of an unobserved state level effect in the error term more recently john pepper 2002 showed how accounting for multi level clustering can have dramatic effects on t statistics while adjusting for clustering is much more common than it was 10 years ago inference methods robust to cluster correlation are not used routinely across all relevant settings in this paper i provide an overview of applications of cluster sample methods both to cluster samples and to panel data sets

taxation of corporate capital income tax revenues versus tax distortions this paper shows that when uncertainty is taken into account explicitly taxation of corporate income can leave corporate investment incentives and individual savings incentives basically unaffected in spite of the sizable tax revenues collected in some plausible situations such taxes can increase efficiency the explanation for these surprising results is that the government by taxing capital income absorbs a certain fraction of both the expected return and the uncertainty in the return while investors as a result receive a lower expected return they also bear less risk when they invest and these two effects are largely offsetting

how much do taxes discourage incorporation the double taxation of corporate income should discourage firms from incorporating we investigate the extent to which the aggregate allocation of assets and taxable income in the united states between corporate and noncorporate firms responds to the size of this tax distortion during the period 1959 1986 in theory profitable firms should shift out of the corporate sector when the tax distortion is large and conversely for firms with tax losses our empirical results provide strong support for these forecasts and imply that the resulting excess burden equals 16 percent of business tax revenue one of the most basic distortions created by the double taxation of corporate income in the united states is the disincentive to incorporate even in most countries with integrated or partially integrated tax systems there are differential taxes across organizational forms however obvious this distortion may be most articles investigating the distortions created by the corporate tax have taken as exogenous a firm s choice whether or not to incorporate assuming for example that some industries are inherently corporate while others are inherently noncorporate a variety of nontax factors described below can certainly influence a firm s choice of organizational form causing some to favor incorporating and others not but are these nontax factors so dominant that taxes do not in practice influence a firm s choice of organizational form as gravelle and kotlikoff 1989 1993 emphasize tax induced changes in firms choices of organizational form in principle can create large excess burdens the size of these excess burdens in practice depends on the extent to which firms respond to these tax incentives in this article we calculate how the tax distortion discouraging firms from incorporating has varied over time then estimate the extent to which the allocation of assets and taxable income between corporate and noncorporate

evaluating the effects of ace systems on multinational debt financing and investment abstract theory recommends aligning the tax treatment of debt and equity a few countries notably belgium have introduced an allowance for corporate equity ace to achieve tax neutrality we study the effects of adopting an ace on debt financing passive investment and active investment of multinational firms using high quality administrative data on virtually all german based multinationals we use two main identification strategies based on 1 synthetic control methods and 2 variations across affiliates within the multinational group our results suggest that an ace reduces the corporate debt ratio of multinational affiliates additionally an ace increases intra group lending and other forms of passive investment but has no effects on production investment of multinational affiliates the findings indicate that a unilateral implementation of an ace system generates a tax planning opportunity using a structure combining the benefits from the ace with interest deductions

plant size and the decline of unionism abstract declining plant size is shown to explain a significant portion of the recent decline in unionism particularly in manufacturing the paper also shows how to use the probit model to decompose the change in unionism into explained and unexplained components

the debt tax shield in general equilibrium abstract we study the general equilibrium effects of the corporate debt tax shield in an endowment economy with a redistributive tax system that taxes firm profits and household income and redistributes tax revenues in an attempt to harmonize households lifetime consumption opportunities in general equilibrium the debt tax shield not only affects corporate capital structure and valuation but also causes poorer households to consume more and save less at a younger age without the debt tax shield the same welfare improvements for poorer households are achievable with significantly lower tax rates

active learning monte carlo results abstract the revival of interest in learning in stochastic control models invites the examination of some unanswered issues from earlier work following in the tradition of prescott and macrae we consider active learning to examine the question of when these methods are superior to passive learning in the earlier literature it was not possible to address this question because computer speeds were not great enough however modern supercomputers make it possible to reopen this issue in this paper we will examine two well known stochastic control models the macrae model and the abel model although no general conclusions can be drawn the results from the macrae model and the abel model indicate that in certain cases active learning may be superior to passive learning and certainty equivalence in the almost all cases we have analyzed so far active learning is superior to passive learning which in turn is superior to certainty equivalence