Taxing Firms Facing Financial Frictions

Transcription

1 Taxing Firms Facing Financial Frictions Daniel Wills 1 Gustavo Camilo 2 1 Universidad de los Andes 2 Cornerstone November 11, 2017 NTA 2017 Conference

2 Corporate income is often taxed at different sources Equity at the firm level Corporate income tax (τ c ) Equity at the individual level Dividends (τd ) and capital gains taxes (τ g ) Debt at the individual level Household income tax due to interest payments (τi )

3 Motivation and question Some countries like the U.S, Chile and more recently Colombia, tax dividends on top of corporate profits Under financial frictions, linear taxes on dividends and corporate profits are not equivalent Research question: What is the effect of replacing the corporate income tax by a tax on shareholders, in a revenue neutral way?

4 What we do We use a model of heterogenous firm dynamics idiosyncratic productivity, borrowing constraints, costly equity issuance, and endogenous entry and exit We calibrate the model to U.S. data Compustat industrial files from 2003 to 2015, We find that in steady state, total factor productivity increases by 1.7%. output increases by 6.8%

5 Mechanism Firms are hit by idiosyncratic productivity shocks Conditional on productivity, there is an optimal size Due to financial frictions, adjustment of capital stock is not immediate Instead, profits are (often) re-invested The corporate income tax reduces such profits This delays capital accumulation Taxing at the shareholder level does not reduce net worth

6 General Equilibrium Feedback Faster capital accumulation increases labor demand Higher wage forces least productive firms to exit Households increase their labor supply

7 Literature 1] Theory Traditional View [Poterba and Summers, 1984] New View [Auerbach, 1979], [Bradford, 1981], [King, 1974] Marginal source of investment is exogenous 2] Empirics Dividend tax cuts have no effect of investment [Yagan, 2015] Bonus depreciation allowances have a strong effect on investment [Zwick et al., 2014] Difference in difference approach 3] Closest papers [Gourio and Miao, 2010], [Gourio and Miao, 2011]. Bush tax cuts increased steady state stock of capital by 4%. Equity and retained earnings differ only because of tax reasons.

8 Model Overview Discrete time, infinite horizon Representative household owns the firms and supplies labor. log (C κl 1+1/γ) Heterogenous firms invest to reach an optimal size. zk α k l α l f z logn (ρz, σ 2 ) Firms face collateral constraints and equity issuance costs. b θ(1 δ)k λ 0 + λ 1 e

9 Model Overview (cont.) Endogenous entry and exit. Government uses linear tax rates to finance exogenous expenditure G. Operating profits: π(k, z) = max zk α k l α l f wl l ( ) Corporate taxes paid: τ c π(k, z) δk rb Define net worth as ω = π(k, z) τ c ( π(k, z) δk rb ) + (1 δ)k (1 + r)b

10 Firms Objective No arbitrage, (1 τ i )r = (1 τ g ) E 0 E E + (1 τ d ) D E When new shares are issued, E (s) = E 0 (s) + N(s) + Λ( N(s) ) Firms maximize the market (cum-dividend) value P(s) = 1 τ d 1 τ g }{{} 1 τ d ( D(s) N(s) Λ(N(s)) + ) τ i r 1 τ g }{{} β P (s)

11 Firms Bellman Equation Let φ = 1{d < 0} Subject to P(ω, z) = max (1 φ)(1 τ d)d + φ ( d Λ( d) ) k,b [ + βe z max { Ω(k, b ), P(ω, z ) } ] z θ(1 δ)k b (Collateral Constraint) ω = (1 τ c ) ( π(z, k ) δk rb ) + k b d = ω k + b Ω(k, b ) = (1 τ d ) [ (1 (1 τ c )δ)k (1 + (1 τ c )r)b ] is the value of exit

12 Entry Free entry EP(0, z) = c e, if M > 0 EP(0, z) < c e, if M = 0 Entrants draw the productivity shock from the ergodic distribution of z

13 Firm Policies Small firms issue equity, bigger firms use debt. Only big firms distribute dividends k' b' Net distributions Policy Functions Policies Mass of firms Net worth

14 Corporate Income Tax Lower corporate income taxes increase investment k' Change in Corporate Income Tax Partial equilibrium effect τ c = τ c = Mass of firms Net worth FOC

15 Dividend and Capital Gains Taxes The equity - retained earnings margin is not distorted Change in Dividend Tax and Capital Gains Partial equilibrium effect k' τ d = τ g = τ d = τ g = Mass of firms Net worth

16 Calibration Key parameters are calibrated via SMM. We use data from the Compustat industrial files, from 2003 to θ, λ 0, λ 1 drive the severity of financial frictions. δ drives investment in steady state. ρ z, σ z, f drive turnover. A second set of parameters is fixed. We use estimates typically found in the literature.

17 Calibration Targeted Parameters Parameter Value Target / Source θ Average leverage λ Frequency of equity issuances λ Average equity issuances δ Average investment rate ρ z 0.75 Autocorrelation of profits to assets σ z Std. deviation of profits to assets H 3.4 Aggregate hours f Average dividends to profits c e Turnover Targeted parameters are estimated via Simulated Method of Moments. In front of each parameter is the moment that is most informative to identify the corresponding parameter.

18 Parameterization Fixed Parameters Parameter Value Target / Source γ 0.5 [Chetty et al., 2011] β % interest rate α l 0.64 Prescott (1986) α k 0.23 Midpoint of [0.83,0.91] DRS in Lee (2005) Tax Rates τ c 0.35 Top statutory rate τ d 0.15 Top statutory rate τ g 0.15 Top statutory rate τ i, τ l 0.28 Mendoza, Razin, Tesar (1994)

19 Targeted Moments Data Model Average investment rate Standard deviation of profits Average leverage Average equity issuances Frequency of equity issuances Autocovariance of profits Turnover (Lee, Mukoyama) Time at work Average dividends to profits Data moments are computed using Compustat annual industrial files Autocorrelation and standard deviation of profits are computed using both firm and time fixed effects.

20 Thought experiment In the baseline model, government expenditures 12.9% of GDP. 1 We fix the value of G, and find τ such that, G = τ i rb + τd + ˆτ c (Π δk rb f ) + τ (E E) + τ l (wl) for ˆτ c [0.35, 0.0] 1 Compared to 9.05% average between and

21 τ Capital Wage Corporate tax TFP Corporate tax Labor Corporate tax Steady State Utility

22 Results τ c 35% 0% Output Capital Labor Consumption TFP Wage SS utility Turnover 5% 9%

23 Channels 1. Faster capital accumulation 2. Higher wage and exit by low productivity firms 3. Labor supply

24 Faster capital accumulation 120 Capital Accumulation Before and After Reform Benchmark Reform Capital Time since entry

25 Reallocation Distribution of Productivity τ c = τ c = Fraction of capital Productivity

26 Decomposition What would be the effect of the reform if firms and households faced the pre-reform wage, but the post-reform tax and interest rates? What would be the effect of the reform if labor supply was inelastic?

27 Decomposition Pre-reform Accumulation Reallocation Post-reform Output Capital Labor

28 Conclusion We studied the effects of replacing the corporate income taxation, by a tax on shareholders, in a model with borrowing constraints, costly equity issuances and endogenous entry and exit. When capital gains can be taxed on accrual (or equity issuances are tax deductible), eliminating the corporate income in a revenue neutral way increases steady state GDP by 6.8%, TFP by 1.7%. More generally, models of heterogenous firms facing financial frictions are promising to rationalize empirical tax elasticities.

29 Auerbach, A. J. (1979). Share valuation and corporate equity policy. Journal of Public Economics, 11(3): Bradford, D. F. (1981). The incidence and allocation effects of a tax on corporate distributions. Journal of Public Economics, 15(1):1 22. Chetty, R., Guren, A., Manoli, D., and Weber, A. (2011). Are micro and macro labor supply elasticities consistent? a review of evidence on the intensive and extensive margins. The American Economic Review, 101(3): Gourio, F. and Miao, J. (2010). Firm heterogeneity and the long-run effects of dividend tax reform. American Economic Journal: Macroeconomics, pages Gourio, F. and Miao, J. (2011).

30 Transitional dynamics of dividend and capital gains tax cuts. Review of Economic Dynamics, 14(2): King, M. A. (1974). Taxation and the cost of capital. The Review of Economic Studies, pages Poterba, J. M. and Summers, L. H. (1984). The economic effects of dividend taxation. Yagan, D. (2015). Capital tax reform and the real economy: The effects of the 2003 dividend tax cut. The American Economic Review, 105(12): Zwick, E., Mahon, J., et al. (2014). Do financial frictions amplify fiscal policy? evidence from business investment stimulus. Harvard University.

31 Robustness Set τ i = τ g = τ d. τ c 35% 0% Output Capital Labor Consumption TFP Wage SS utility Turnover 5% 9%

32 Dividend, Capital Gains Taxes and Interests Firm policies are unchanged Change in Dividend Tax and Capital Gains Partial equilibrium effect k' τ d = τ g = τ i = τ d = τ g = τ i = Mass of firms Net worth

33 Timing t t + 1 production (k, b) z exit ω k, b entry (M) z

34 Household First Order Conditions No arbitrage, Labor supply (1 τ i )r = (1 τ g ) E 0 E E + (1 τ d ) D E u l (C, L) = (1 τ l )wu c (C, L) Euler equation u c (C, L) = (1 + (1 τ i )r)βev (A ) The inter-temporal wedge only depends on the personal income tax. Equilibrium Definition

35 Stationary Equilibrium Allocation rules C, B, L for the household, Allocation rules k, b, l for each firm, A mass of entrants E and a measure G, such that, C, B, L solve the household problem, given r, w k, b, l, and exit decision solve the firm problem, given r, w M is consistent with free entry B = q (ω, z)dg(ω, z) L = l (ω, z)dg(ω, z) G (, Z) = G(, Z) back

36 Compustat Time Series Assets Age Leverage Age Equity isuance to assets Total Payout Age Age back

37 Investment Decision ( ) P ω ω, z β 1 = (1 τ d )(1 (1 τ c )δ)pr ( z < z (k, b ) ) z ( + P ω ω, z )( (1 τ c ) ( αz k α 1 δ ) ) + 1 π(z z)dz z (k,b ) where ( P ω ω, z ) = 1 τ d if φ(w, z ) = 0 = 1 + λ 1 if φ(w, z ) = 1 back

38 Investment Decision ( ) P ω ω, z β 1 = (1 τ d )(1 (1 τ c )δ)pr ( z < z (k, b ) ) z ( + P ω ω, z )( (1 τ c ) ( αz k α 1 δ ) ) + 1 π(z z)dz z (k,b ) where ( P ω ω, z ) = 1 τ d if φ(w, z ) = 0 = 1 + λ 1 if φ(w, z ) = 1 If firm is issuing equity, investment is decreased by dividend taxes. If it is distributing dividends, investment is increased. back

39 Investment Decision ( ) P ω ω, z β 1 = (1 τ d )(1 (1 τ c )δ)pr ( z < z (k, b ) ) z ( + P ω ω, z )( (1 τ c ) ( αz k α 1 δ ) ) + 1 π(z z)dz z (k,b ) where ( P ω ω, z ) = 1 τ d if φ(w, z ) = 0 = 1 + λ 1 if φ(w, z ) = 1 Corporate taxes deacrese the marginal product of capital in every state of the world. back

40 Exit There is a unique z (k, q ) such that (1 τ d ) [ (1 (1 τ c )δ)k (1 + (1 τ c )r)b ] = P ( ω (z, k, b ), z ) and firms exit if and only if z < z (k, b ) z increases in τ c. z decreases in τ d. back