Abstract: We evaluate the effects of corporate taxation on firms' investment and financing choices. We focus on how the asymmetry of the corporate tax, imperfect loss carry-overs, endogenous financing with credit constraints, and different degrees of investment irreversibility affect both incremental investment and entry decisions. We find that, as long as capital can be financed with debt at the margin, the tax distortions on the marginal investment decision are small. This is particularly so if the technology is flexible. In contrast, the tax distortions on the entry decision are substantial. The ability of firms to carry over their losses and choose their financial structure endogenously are important for reducing both types of distortions.
Keywords: Irreversible investment, corporate finance, assymetric taxation
JEL Classification: E22;H25;G32