Corporate income taxes, corporate debt, and household debt

Jinbaek Park, Young Lee

Research output: Contribution to journalArticle

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.

Original languageEnglish
Pages (from-to)506-535
Number of pages30
JournalInternational Tax and Public Finance
Volume26
Issue number3
DOIs
StatePublished - 2019 Jun 15

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Household debt
Corporate debt
Corporate income tax
Household
Debt
Tax rate
Tax competition
Small countries
Panel data
Private debt
Tax
Payment
Loanable funds
Tax cuts
Indebtedness
OECD countries

Keywords

  • Corporate debt
  • Corporate income tax rates
  • Household debt
  • Tax competition

Cite this

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Corporate income taxes, corporate debt, and household debt. / Park, Jinbaek; Lee, Young.

In: International Tax and Public Finance, Vol. 26, No. 3, 15.06.2019, p. 506-535.

Research output: Contribution to journalArticle

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