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International Tax and Public Finance
Erschienen in: International Tax and Public Finance 3/2019

03.09.2018

Corporate income taxes, corporate debt, and household debt

verfasst von: Jinbaek Park, Young Lee

Erschienen in: International Tax and Public Finance | Ausgabe 3/2019

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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.
Vorheriger Artikel Tax competition and the efficiency of “benefit-related” business taxes
Nächster Artikel Your biggest refund, guaranteed? Internet access, tax filing method, and reported tax liability

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Fußnoten
1
The ‘static trade-off’ theory (Myers 1984) modifies the excessive use of debt by trading-off the benefits of debt against the costs from the increased likelihood of bankruptcy resulting from higher levels of debt.
 
2
CIT and short-term interest rate are found to be positively associated as predicted in this partial equilibrium analysis. The raw correlation between two variables is 0.080 (p value = 0.078, n = 480), and the estimated coefficient of CIT in the regression of interest rates with country dummies is 0.41 (s.e = 0.027, n = 480).
 
3
The extent of a decrease in interest rates from a lower CIT rate is limited by an increase in quantity demanded by households. In countries with a large household debt market, therefore, a decrease in interest rates from a lower CIT rate is predicted to be smaller. In preliminary regressions of short-term interest rates on CIT and interaction term between CIT and the share of household debt in the total debt, the estimated coefficient of the interaction term is estimated significantly negative, − 0.011 (s.e = 0.0018).
 
4
CIT is estimated to be positively associated with government debt with the correlation coefficient 0.45 (p value = 0.00). Larger government debt would lead to lower price of government debt and higher interest rates.
 
5
A more careful theoretical and empirical investigation of the effect of CIT on interest rates is left as a topic for future research.
 
6
Categorization of institutions by OECD is as follows: total economy (S1), non-financial corporations (S11), financial corporations (S12), general government (S13), households (S14), and nonprofit institutions serving households (NPISHs, S15). Examples of sub-categorization are banking sector (S121 + S122 + S123) and central government (S1311).
 
7
The estimation results remain the same qualitatively when interest rates are not included. Since interest rates can be argued to be endogenous, it is necessary to treat these variables more carefully in structural equation estimations. We leave this as a topic for future research.
 
8
Beck et al. (2012) conjecture that urbanization helps to overcome the lack of economies of scale associated with household loans and that the share of urban population in a country is a trait that is positively associated with a higher share of household credit in total credit. In our regression results, urbanization becomes insignificant in the household debt regressions when the country-specific trends are added.
 
9
We experimented with year dummies instead of time trend. When year dummies are used, the coefficients of CIT are estimated to be more significant for corporate debt regressions and much less significant for household debt regressions.
 
10
An additional concern about the specification is endogeneity. There may exist two-way causality between CIT and debt, especially corporate debt. On the one hand, the tax advantage of debt induces larger debt. On the other hand, a higher corporate debt may lower tax revenue and induce the government to raise CIT rates. To control for reverse causality from debt to CIT, we experiment with instrumental variable (IV) estimation for CIT. We attempt to explain CIT rates by global tax competition, domestic economic/social need, and economic/social/political environment, following the literature on tax competition (Slemrod 2004; Devereux et al. 2008; Overesch and Rincke 2011; Devereux and Loretz 2013; Lee 2017). Since our IV estimation results appear unstable and weak, we leave it as a topic for future research.
 
11
I appreciate the excellent and careful data collection of Jinbaek Park and Byungsup Cha.
 
12
We corrected some tax rates from OECD Statistics. CIT rates are corrected or compiled for France (36.09% in 2012 and 2013; 37.99% in 2014–2016, reflecting CIT surcharge for large firms), Korea (32.25% in 1995), Estonia (26% between 1994 and 1999), and Slovenia (25% between 1995 and 1999). PIT rates are corrected or compiled for Denmark (70% between 1981 and 1986; 68% in 1987), Greece (60% in 1983; 45% in 2000; 42.5% in 2001), Luxembourg (57% in 1983 and 1984; 50% in 1997; 42% in 2001), Malaysia (29% in 2001), Slovak Republic (42% in 2001), Slovenia (50% in 2000 and 2001), Spain (56% in 1997 and 1998; 48% in 1999), and Switzerland (compiled using original tables of OECD for tax rates before 1999).
 
13
Explanation about the variables from the OECD is as follows. Real housing prices are calculated as nominal house prices deflated using the private consumption deflator from the national account statistics. Short-term interest rates are the rates at which short-term borrowing is effected between financial institutions or the rate at which short-term government paper is issued or traded on the market. Short-term interest rates are generally averages of daily rates, measured as a percentage. Short-term interest rates are based on three-month money market rates where available. Typical standardized names are ‘money market rate’ and ‘treasury bill rate.’
 
14
The USA and France plan to lower the CIT rates.
 
15
When the associations between CIT and household debt are investigated for each country, Germany is one of the few countries not showing a negative relation. There might be changes in Germany favoring the use of household debt while CIT was lowered. One candidate for these changes is the German introduction of dual income tax in 2009. Interest income used to be fully taxed at progressive personal income tax rates before 2009 and from 2009 was taxed at flat 25%. This large drop in interest income tax rates may keep the attractiveness of corporate debt while CIT rates decreases. Note that Miller tax term, \( \left[\tau_{it} + \left( {1 - \tau_{it}^{{}} } \right)t_{it}^{E}\right] - \left[ {t_{it}^{I} } \right], \) may not change much when both CIT rates and interest income tax rates decrease at the same time.
 
16
When we calculate cluster-robust standard errors, we follow the method suggested by Cameron and Miller (2015).
 
17
We experimented with many different sets of independent variables and different estimation methods. Hausman’s tests indicate fixed effect estimations are preferred in all regressions. Though fixed effect estimations are always preferred in the regressions with country-specific trends, random effects are also frequently preferred by Hausman tests in the regressions without country-specific trends.
 
18
If we assume that CIT affects only corporate debt but not household debt, calculation using averages and the estimated coefficient in column (3) implies that the coefficient of CIT in column (5) would be around −0.105. The estimated coefficient of CIT in column (5), in fact, is −0.19 and is almost twice as large as the calculated coefficient assuming no effect on household debt.
 
19
Survey of US corporate managers in Graham et al. (2017) shows that in the capital structure decision-making process 50.4% of the respondents use US statutory tax rates or jurisdiction specific statutory tax rates instead of average rates in accounting or marginal tax rates.
 
20
The estimated coefficients of CIT in the regressions of the level of household debt in Table 3 are not statistically significant when cluster-robust standard errors are used. When year dummies are used instead of time trend and its square, the estimated coefficients of CIT in the regressions of household debt become much less significant.
 
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Metadaten
Titel
Corporate income taxes, corporate debt, and household debt
verfasst von
Jinbaek Park
Young Lee
Publikationsdatum
03.09.2018
Verlag
Springer US
Erschienen in
International Tax and Public Finance / Ausgabe 3/2019
Print ISSN: 0927-5940
Elektronische ISSN: 1573-6970
DOI
https://doi.org/10.1007/s10797-018-9513-4

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