Estimating the effect of corporate income tax reductions : a comparative case study on the capital structure of financial corporations

Abstract

This thesis aims to investigate the effects of a corporate income tax rate change on financial corporations’ capital structure. We perform two case studies on financial corporations located in Austria and the Netherlands to answer this question. These studies take place over a decade from 2000 – 2010 using nine OECD-countries as controls. For the estimation of the effect of corporate taxation, we apply the synthetic control method. We construct a counterfactual outcome for both countries, where no change to the corporate income tax rate occurred. We do this by constructing a weighted average of control countries unaffected by such a change to the corporate income tax rate. We find that both Austrian and Dutch financial corporations on average lowered their debt-toequity ratios a little over 30 % compared to its synthetic control. Our results indicate that there is a positive effect of a change to the corporate income tax rate on the capital structure of financial corporations. To test the significance of our estimates we conduct placebo tests to see if we get results of similar magnitude when considering countries that did not implement such tax reforms. The results of these test are however ambiguous, where we find an effect of taxes on capital structure to be significant when conducting a one-sided hypothesis test, but we do not when conducting a two-sided test. Our results are also robust when we place different restrictions on the synthetic control. The fact that we get results of similar magnitude for both Austria and the Netherlands assures us that our results are quite robust. Consequently, we find that there is a strong indication of corporate income taxes positively affecting the capital structure of financial corporations.