Heterogeneous Responses to Corporate Marginal Tax Rates: Evidence from Small and Large Firms

Ruhollah (Omid) Eskandari, Morteza Zamanian*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

Abstract

Do small and large firms respond differently to tax cuts? Using new narrative measures of the exogenous variation in corporate marginal tax rates and a unique dataset of U.S. manufacturing firms, we find that the investment of large firms is more sensitive to a marginal tax cut than that of small firms. Furthermore, we show that small firms finance their new investments almost entirely through debt, whereas large firms use both cash and debt. Following a tax cut, the tax advantage of debt financing falls relative to cash financing. This substitution effect is more pronounced for large firms and induces them to rely on cash financing to a larger extent than small firms.
Original languageEnglish
Number of pages30
JournalJournal of Applied Econometrics
Early online date31 Jul 2023
DOIs
Publication statusE-pub ahead of print - 31 Jul 2023

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