Publication

Journal	International Tax and Public Finance
Title of proceedings	International Tax and Public Finance
DOI	10.1007/s10797-012-9247-7

In the absence of financing frictions, profit taxes reduce investment by their effect on the user cost of capital. With finance constraints due to moral hazard, investment becomes sensitive to cash-flow and own equity of firms. In this situation, even small taxes impose first order welfare losses, and ACE and cash-flow tax systems are no longer investment neutral. When banks are active and provide external finance together with monitoring services, the timing of tax payments becomes important. The ACE system, which gives tax relief at the late return stage rather than upfront, is then superior to the cash-flow tax.