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Profit taxes and financing constraints

Type of publication Peer-reviewed
Publikationsform Original article (peer-reviewed)
Author Keuschnigg Christian, Ribi Evelyn,
Project Corporate Finance, Taxation and Economic Performance
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Original article (peer-reviewed)

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


Without financing frictions, profit taxes reduce investment by their effect on the user cost of capital. With financing constraints, investment becomes sensitive to cash-flow. In this situation, even small taxes impose first order welfare losses, and ACE and cash-flow tax systems are no longer neutral. When banks become active and provide monitoring services in addition to finance, an ACE tax yields larger investment and welfare than an equal yield cash-flow tax.