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Corporate Taxes and Capital Structure: A Long-Term Historical Perspective

Author

Listed:
  • Fleckenstein, Matthias
  • Longstaff, Francis A.
  • Strebulaev, Ilya A.

Abstract

We study the time series relation between leverage and corporate tax rates using an extensive data set constructed from all corporate income tax returns filed with the Internal Revenue Service from 1926 to 2013. This data set includes financial statement data from millions of private and public corporations. We find strong evidence that changes in corporate leverage are directly related to changes in corporate tax rates for all but the smallest firms. These results are robust to the inclusion of control variables for the costs of financial distress, corporate liquidity, and capital market and macroeconomic conditions. Furthermore, the results hold for both financial and nonfinancial firms as well as for different measures of firm leverage and the marginal corporate income tax rate. An increase in the marginal corporate tax rate of 1% translates into a 0.15% increase in corporate leverage, representing a $132 billion increase in aggregate leverage based on current values.

Suggested Citation

  • Fleckenstein, Matthias & Longstaff, Francis A. & Strebulaev, Ilya A., 2020. "Corporate Taxes and Capital Structure: A Long-Term Historical Perspective," Critical Finance Review, now publishers, vol. 9(1-2), pages 1-28, June.
    • Handle: RePEc:now:jnlcfr:104.00000069
    DOI: 10.1561/104.00000069
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    More about this item

    Keywords

    Corporate taxes; Leverage; Capital structure;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies

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