Essays on Corporate Taxation: Theory and Empirics in the presence of Financial Frictions

This dissertation studies the crucial role of financial frictions in the realm of shaping an optimal corporate taxation policy and in the transmission of corporate taxation to firms using both theoretical and empirical evidence. The first chapter 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.

The second chapter 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.