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This paper reviews the theory and evidence regarding the impact of taxation on corporate financial policy. Starting from a basic characterization of the classical corporate income tax and its effects, the analysis focuses on three areas of research: equity policy, debt-equity decisions, and choices regarding ownership structure and organizational form. The discussion stresses the distinction between nominal and more fundamental financial differences for example, in the relationship between borrowing and leasing and that financial policy involves choices not only among different underlying policies but also among characterizations of a given policy. The final section offers some brief reflections on the implications of continuing financial innovation.

The traditional view is that interest deductibility encourages firms to use debt financing; however, some argue that the personal tax disadvantage to interest offsets the corporate tax advantage. This paper investigates the degree to which personal taxes affect corporate financing decisions. In crosssectional regressions that control for personal taxes, debt usage is positively correlated with tax rates in each year 1980-1994, with significant coefficients in almost every year. A specification that adjusts tax benefits for the personal tax penalty statistically dominates a specification that does not. The positive (negative) effect of corporate (personal) taxes on debt usage is distinctly identified.

This paper uses U.S. Statistics of Income (SOI) Corporate Income TaxReturns 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.

JEL No. H3, G3 This paper analyzes the effects of dividend taxation on corporate behavior using the large tax cut on individual dividend income enacted in 2003. Using data spanning 1980 to 2004-Q2, we document a sharp and widespread surge in dividend payments following the tax cut, along several dimensions. First, an unprecedented number of firms initiated regular dividend payments after the reform. As a result, the number of publicly traded firms paying dividends, after having declined continuously for more than two decades, began to increase precisely in 2003. Second, many firms that were already paying dividends prior to the reform raised regular dividend payments significantly. Third, special dividends also rose. All of these effects are robust to introducing controls for profits and other firm characteristics. Additional evidence for specific groups of firms suggests that the tax cut induced

The value of debt tax shields in foundational valuation models by Nobel Laureates Modigliani and Miller (MM) continues to be a controversial issue that is central to our understanding of corporate finance. This paper contributes to this pivotal debate by proposing that the appropriate discount rate to value interest tax deductions available to levered shareholders is the levered cost of equity, rather than riskless and risky costs of debt or the unlevered cost of equity in previous studies. Assuming no bankruptcy risk and no personal taxes, the proposed revised tax model yields the following results that are more consistent with MM’s original tax model than their later corrected tax model. Implications to corporate capital structure decisions and previous literature are discussed. Also, analyses are extended to Miller’s personal tax extension of the MM model.

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Corporate taxation can play an important role in a firm's choice of organizational form by changing the relative attractiveness of incorporating. Recent general equilibrium models have shown that with substantial shifting between corporate and noncorporate activity in response to taxation, the dead weight loss of the corporate income tax can be very high. This paper tests the empirical importance of this idea by estimating the impact of taxes on the noncorporate share of capital for various sectors using data from 1900-1939--a period of large and frequent changes in both corporate and personal tax rates. The results indicate that taxes do matter for organizational form decisions but the magnitude of the effect is small. An increase in the corporate rate of.10 raises the noncorporate share of capital between.2 and 3 percentage points. At this magnitude, the dead weight loss of the corporate income tax is less than 10 % of revenue. JEL Classification: Keywords:

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