Research seminar: Estimating the tax elasticity of firm debt: What can we learn from bunching?

Estimating the tax elasticity of firm debt: What can we learn from bunching?

Martin Andresen (SSB), Lars Thorvaldsen (UiO)

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Abstract: We exploit the introduction of a thin capitalization rule and access to rich panel data in Norway to estimate the tax elasticity of corporate debt. The new regulation leads to a significant increase in firms' tax liability above the threshold of net interest costs, and firms in the vicinity of these thresholds are incentivized to bunch at the cutoff. We build a model to relate the observed excessive mass at the threshold to the underlying structural elasticity, and estimate an elasticity of debt to the effective net-of-tax of 1.44.