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Cash-flow business taxation revisited: bankruptcy and asymmetric information

Author

Listed:
  • Robin Boadway

    (Queen’s University)

  • Motohiro Sato

    (Hitotsubashi University)

  • Jean-François Tremblay

    (University of Ottawa)

Abstract

We study the effects of cash-flow taxation on firms’ entry and investment decisions when there is bankruptcy risk and when banks face asymmetric information problems in financing heterogeneous firms. When there is moral hazard, firms under-invest, while with adverse selection too many firms enter. Cash-flow taxation applying to both real and financial cash flows corrects these distortions by inducing more investment in rent-generating projects where moral hazard exists and reducing firm entry under adverse selection. Our results in the moral hazard case depend on the tax losses of bankrupt firms accruing to the banks. If bankrupt firms retain tax losses, the cash-flow corporate tax is neutral as in Bond and Devereux (J Public Econ 87:1291–1311, 2003).

Suggested Citation

  • Robin Boadway & Motohiro Sato & Jean-François Tremblay, 2022. "Cash-flow business taxation revisited: bankruptcy and asymmetric information," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 29(4), pages 922-952, August.
    • Handle: RePEc:kap:itaxpf:v:29:y:2022:i:4:d:10.1007_s10797-021-09696-9
    DOI: 10.1007/s10797-021-09696-9
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    More about this item

    Keywords

    Cash-flow tax; Bankruptcy; Asymmetric information;
    All these keywords.

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies

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