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Corporate income taxes, corporate debt, and household debt

Author

Listed:
  • Jinbaek Park

    (Korea Appraisal Board)

  • Young Lee

    (Hanyang University)

Abstract

We find that corporate income tax (CIT) rates are significantly positively associated with corporate debt and negatively associated with household debt, using panel data of 28 OECD countries between 1995 and 2015. The found association between CIT and debt comes from small countries where CIT is more exogenous due to tax competition. The tax deductibility of interest payments encourages firms to use more debt when CIT is high. If the total supply of loanable funds is not affected by a lower CIT, a lower CIT leads to a larger fraction of the total private debt incurred by the household sector. The estimated association becomes stronger in regressions with difference-stationary variables. A decrease in the CIT rate can explain around one-fourth of the increase in the average household debt incurred during the last two decades. The paper is the first study to investigate and yield supportive, though weak, evidence of distortion in household indebtedness caused by a CIT cut.

Suggested Citation

  • Jinbaek Park & Young Lee, 2019. "Corporate income taxes, corporate debt, and household debt," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 26(3), pages 506-535, June.
    • Handle: RePEc:kap:itaxpf:v:26:y:2019:i:3:d:10.1007_s10797-018-9513-4
    DOI: 10.1007/s10797-018-9513-4
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    More about this item

    Keywords

    Corporate income tax rates; Corporate debt; Household debt; Tax competition;
    All these keywords.

    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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