Heterogeneous Effects of Corporate Taxation on Firm Behavior 

Abstract: This study estimates the role of financial constraints and market power in the transmission of corporate taxation to firms. Using firm-specific corporate marginal tax rates and a narrative measure of exogenous changes in statutory tax rates, I estimate the responses of investment, debt, and dividends to corporate tax rate changes in the United States since 1980, and present three main findings. First, while financially constrained firms respond to a cut in the marginal tax rate with increasing investment and debt, unconstrained firms show a response of lower investment and debt. Second, the cut in the marginal tax rate leads to persistent lower investment and higher dividends for unconstrained firms with higher markups. Third, I find no significant investment responses to a universal corporate statutory tax rate cut. To rationalize these results, I build a partial equilibrium model where the relationship between the corporate tax rate and the cost of capital depends on firms’ borrowing constraints and market power. The predictions of the model are consistent with my empirical findings.

Optimal Corporate Taxation in the presence of Financial Frictions

Abstract: The paper examines the optimal corporate taxation policy in a macroeconomic model with borrowing constraints. Within the models I consider the choice of optimal corporate tax rate in the steady state and the dynamic response of the optimal tax rate to monetary policy shocks. I find that during an economic boom with counter-cyclical markups and pro-cyclical profits when wage rigidity outweighs price rigidity, the optimal corporate tax rate increases to mitigate the monopolistic price distortions and it increases monotonically more when firms face higher borrowing capacity and higher deductibility of interest payments on debt.

Crisis in Sri Lanka: Lessons from the Asian Financial Crisis, author of the Spotlight section of World Bank publication South Asia Economic Focus, Fall 2022

Interest Rate Caps: The Theory and The Practice, with Aurora Ferrari and Oliver Masetti, World Bank Policy Research Working Paper, April 2018

Comparison and Analysis of China-US New firms and Its Effects on Employment, with Changan Li, Journal of Henan Institute of Science and Technology, April 2011

Research assistance provided for:

Cross-country Evidence on the Revenue Impact of Tax Reforms, IMF Working Paper No.2022/199, September 2022

State-ownership of financial institutions in Europe and Central Asia, World Bank Working Paper No.8288, Dec 2017

Global Impact of US and Euro Area Unconventional Monetary Policies: A Comparison, BIS Working Paper No.610, February 2017

Policy Papers

Research assistance provided for:

Increasing Resilience to Large and Volatile Capital Flows: The Role of Macroprudential Policies, IMF Policy Paper, July 2017

Strengthening the International Monetary System—A Stocktaking, IMF Policy Paper, February 2016

Structural Reforms and Macroeconomic Performance - Initial Considerations for the Fund, IMF Policy Paper, October 2015