DEBT AND THE MARGINAL TAX RATE

Do taxes affect corporate debt policy? This paper tests whether the in cremental use of debt is positively related to simulated firm-specific marginal tax rates that account for net operating losses, investment tax credits, and the alternative minimum tax. The simulated marginal t ax rates exhibit substantial variation due to the dynamics of the tax code, tax regime shifts, business cycle effects, and the progressive n ature of the statutory tax schedule. Using annual data from more than 10,000 firms for the years 1980-1992, I provide evidence which indicat es that high-tax-rate firms issue more debt than their low-tax-rate co unterparts.