TAXES, REGULATIONS AND THE CORPORATE DEBT MARKET

Outstanding credit market debt in the U.S. corporate sector increased dramatically over the second half of the 20th century. During this period, tax rates on dividend distributions and corporate income decreased. This article argues that the observed decline in dividend and corporate income tax rates generated an improvement in the collateral value of corporate assets and led to an increase in U.S. corporate debt. To analyze this conjecture, we build a general equilibrium model with enforcement constraints that induce endogenous limits on debt financing. We find that the model can account for the time-series features of U.S. corporate debt data.