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Tax reforms to influence corporate financial policy: the case of the Italian business tax reform of 1997-98

Author

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  • Alessandra Staderini

    (Banca d'Italia)

Abstract

In this paper company-level panel data are used to explore the role of tax changes on corporate financial policy. A panel model for the years 1993-98 is estimated confirming the explanatory power of the tax variable. The estimation also shows that firms reduced leverage in the last three years (1996-98) as a reaction to important tax changes; the reduction in 1996 was the effect of the temporary investment tax credit of the previous year, while the one in 1997-98 was the result of the business tax reform started in 1997. The reform, by modifying the system for taxing profits, termed Dual income Tax (DIT), and introducing a new regional tax on business activity (IRAP), reduced the bias against equity finance that was present in the previous tax system. Focusing on the reform, a Logit model is estimated to highlight the characteristics of firms that used the DIT tax system in the first two years. The probability of using the DIT increases with profitability, productivity and investment. The significance of the latter variable suggests that the DIT system was used by firms to reduce the cost of financing new investments after the temporary investment tax credit of 1995.

Suggested Citation

  • Alessandra Staderini, 2001. "Tax reforms to influence corporate financial policy: the case of the Italian business tax reform of 1997-98," Temi di discussione (Economic working papers) 423, Bank of Italy, Economic Research and International Relations Area.
  • Handle: RePEc:bdi:wptemi:td_423_01
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    Citations

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    Cited by:

    1. Savina Princen, 2012. "Taxes do Affect Corporate Financing Decisions: The Case of Belgian ACE," CESifo Working Paper Series 3713, CESifo.
    2. Cao, Yifei & Whyte, Kemar, 2022. "Corporate Tax Shields and Capital Structure: Levelling the Playing Field in Debt vs Equity Finance," National Institute of Economic and Social Research (NIESR) Discussion Papers 542, National Institute of Economic and Social Research.
    3. Nils aus dem Moore, 2014. "Taxes and Corporate Financing Decisions – Evidence from the Belgian ACE Reform," Ruhr Economic Papers 0533, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.
    4. Finke, Katharina & Heckemeyer, Jost H. & Spengel, Christoph, 2014. "Assessing the impact of introducing an ACE regime: A behavioural corporate microsimulation analysis for Germany," ZEW Discussion Papers 14-033, ZEW - Leibniz Centre for European Economic Research.
    5. Chaudhry, Sajid Mukhtar & Mullineux, Andrew & Agarwal, Natasha, 2015. "Balancing the regulation and taxation of banking," International Review of Financial Analysis, Elsevier, vol. 42(C), pages 38-52.
    6. aus dem Moore, Nils, 2014. "Taxes and Corporate Financing Decisions – Evidence from the Belgian ACE Reform," Ruhr Economic Papers 533, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
    7. Kayis-Kumar, Ann, 2015. "Thin capitalisation rules: A second-best solution to the cross-border debt bias?," MPRA Paper 72031, University Library of Munich, Germany.
    8. Ruud de Mooij & Michael P. Devereux, 2008. "Alternative Systems of Business Tax in Europe: An applied analysis of ACE and CBIT Reforms," Taxation Studies 0023, Directorate General Taxation and Customs Union, European Commission.
    9. Kayis-Kumar, Ann, 2018. "Implementing corporate tax cuts at the expense of neutrality? A legal and optimisation analysis of fundamental reform in practice," MPRA Paper 89703, University Library of Munich, Germany.
    10. Geert Campenhout & Tom Caneghem, 2013. "How did the notional interest deduction affect Belgian SMEs’ capital structure?," Small Business Economics, Springer, vol. 40(2), pages 351-373, February.
    11. Kayis-Kumar, Ann, 2015. "Taxing cross-border intercompany transactions: are financing activities fungible?," MPRA Paper 71615, University Library of Munich, Germany.
    12. repec:zbw:rwirep:0533 is not listed on IDEAS
    13. Carmen Bachmann & Martin Baumann & Konrad Richter, 2018. "The effects on investment incentives of an allowance for corporate equity tax system: the Belgian case as an example," Review of Quantitative Finance and Accounting, Springer, vol. 51(4), pages 943-965, November.
    14. Silvia Magri, 2006. "Debt maturity of Italian firms," Temi di discussione (Economic working papers) 574, Bank of Italy, Economic Research and International Relations Area.

    More about this item

    Keywords

    corporate taxation; corporate financial policy; tax reform;
    All these keywords.

    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm

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