Corporate Income Tax On The Capital Structure

Modigliani and Miller proposed the classical theory of MM in1958, and they thought that the company's dividend policy and capital structure decisions has nothing to do with the company's value. But this conclusion is based on a series of assumptions:the perfect market, no corporate income tax. With the deepening of theory, many scholars had found that MM theory in 1958 and the practice do not match. Difficult to find company to meet the perfect market hypothesis in real life, a number of decisions which affect capital structure exists objectively,such as taxation. With the progress of society and development of economics,tax has become an important factor in people's lives.As the academic community continues to explore and study, Modigliani and Miller improved the capital structure theory by adding the tax factors. Many Western scholars also took this opportunity to study the tax effect of capital structure, and resulted in a lot of classic literature. But compared with the West, China's capital structure from a tax point of view of the literature is relatively small, and not deep enough. Western scholars always studied the capital structure theory after abstract hypothesis based on national tax environment, which is representative of the U.S. tax system. However, the tax environment in China and the United States and other Western countries have great differences, so the context of strengthening the capital structure of the tax research seems extremely important. In drawing on Western theoretical and empirical research,many scholars took tax gradually into the account in the research of capital structure.But in the past, considering the domestic impact of the tax on the capital structure literature, most of the article's made our statutory tax rate or effective tax rate as a proxy variable. It has a certain irrationality.First statutory corporate tax rate can not represent the impact of efforts on the capital structure, because the intensity of many companies due to tax policies such as tax incentives to change. Second, the effective tax rate sometimes does not accurately reflect the impact of tax on the capital structure.Statutory and effective tax rates are likely to come to a negative tax and capital structure related to wrong conclusions, so search for the correct taxation of proxy variables become to be an important issue through studying the tax effect of capital structure.Marginal tax rate (MTR) is the last increase in the amount of 1 per taxable income.According to the theory of domestic and municipal research point of view, relative to the statutory tax rate and the company's actual tax rate, marginal tax rate is a variables to measure the corporate income tax. Marginal tax rates on corporate capital structure decision is useful, marginal tax rates that reflect the difference of corporate income tax at different times, or different companies.Marginal tax rates not only reflect the volatility of revenues, net operating loss (NOL) deferred backward, business tax incentives and other factors. And marginal tax rate before financing can control the endogenous between tax burden and the financing decision. And the marginal tax rate draws on economics thinking way of marginal analysis.lt can took fluctuations in the amount of taxable income, losses carried forward and other factors into account, and can be found between the dynamic relationship between the tax burden and debt financing.Capital structure decisions in the development of enterprises consider the impact of marginal tax rates,there is a a significant positive correlation between the company's marginal tax rate before financing and debt financing.The first chapter first analyzes changes in corporate income tax of China in recent years,and indicate the importance of corporate income tax to capital structure theory. Then the article reviewed analysis on the theory of capital structure at home and abroad, and divided capital structure theory into two types of schools,school of capital strcucture and school of capital structure factors. School of capital structure theory proposed in 1958, mainly in the core of MM theory and research starting point, continuing to join the enterprise income tax, financial distress costs in decision-making theory of capital structure changes. School of capital structure factors is the school principal investigator from an empirical point of view of capital structure factors. Come addition of revenue, a significant impact on the capital structure factors included size, profitability, capacity development, bankruptcy costs.The second chapter discusses the theoretical level, mainly from the mechanism of action of tax on the capital structure. The author first analyzed the status of the financing,and then reviewed the income tax in China and Western history. Furthermore, the author recoveried the macro and micro perspective of the tax on the capital structure. Mainly refers to income tax as a macro mechanism for countries as a means of macroeconomic control, is a regulatory mechanism of market economy. Mainly refers to the mechanism of micro-enterprise income tax will affect the company's cash flow and capital costs. Finally, the article from the point of view of theoretical development of MM to join the corporate income tax before and after the change of capital structure theory.The third chapter mainly refers to verify the relationship between the revenue and capital structure from the empirical point of view. In summing up, based on research results at home and abroad, the article draws Wu Lian-sheng, Heng Yue (2006) article, and formated a new research model. And in order to ensure maximum effectiveness of research results, the paper selected in Shanghai and Shenzhen A shares of all companies, excluding the financial sector and the abnormal data of the company. Finally, empirical test make that the marginal tax rate and the company capital structure is significantly correlated. On the basis of the regression, we conducted a robust test:First, we transform the annual interval, select the data for 2003-2007 (excluding 2002,2008, two policy changes) as a regression study. Second, the effective tax rate instead of the corporate marginal tax rates as the main explanatory variables for regression. Again, we imputation tax in 2008 against the backdrop of the event study, obtained that the decline of therate of assets and liabilities in 2007 into the 2008. Several test of the robustness further evidented that the marginal tax rates are significantly correlated with the capital structure.In the fourth chapter,the author summarized the empirical findings of the study and recommendations. The main conclusions are:first, the marginal tax rate is the level of corporate income tax on behalf of the company. Second, relative to the effective tax rate and statutory tax rates, the marginal tax rates have better decision-making efforts. Again, the marginal tax rate can be expressed in different years, different company tax on the capital structure. Finally, there is a positive correlation between the marginal tax rate before financing decision and capital structure. Lastly, some suggestions:to reduce our corporate income tax rate, debt diversification. General theory divided the firm's cash flow into tax cash flow, equity cash flow and debt cash flow, and the government to share some of the cash flows of the company relying on its tax.However, the government obtained a large number of tax to reduce the company's retained earnings, increasing the company's cost of capital, hindering the development of the company. The long term, equity diversification, diversification of financing channels wre more beneficial for the healthy development of the company, and the existence of high taxes just hindered the development of diversified corporate finance, so appropriate to reduce our corporate income tax rate to provide more for our country internal revenue, and provide more funding to the development of the company. Creditors diversification is the effective way to reduce the risk of capital cost.Article provided a reasonable tax system variables in China to address the problem of the capital structure theory and empirical testing, but also provided a good reference for ideas for Chinese enterprise income tax reform and corporate capital structure decision making.The purpose of this article:I hope that through this study, analyzed comprehensively the mechanism of the tax on the capital structure from the perspective of listed companies, resulting in the tax acts in the corporate finance. Meanwhile,make the analysis of the actual impact of the reform of income tax. Then provided guidance and advice for the subsequent response to tax reform and corporate tax reform strategy and financing policy.Innovation of this paper:first, put the marginal tax rates as a proxy for the tax. Although there is a lot of capital structure theory literature and come up with some results, almost all the literature of domestic statutory put effective tax rates as a proxy for corporate income tax in researching the impact of corporate income tax on the capital structure. There is a certain lack when statutory and effective tax rates as a proxy of corporate income tax,and sometimes drawed the wrong conclusions. Combined with the existing Western theoretical and empirical research, the paper selected the marginal tax rate as the proxy variables of the capital structure,which more accurately described the tax effect of capital structure. Second, this article describe tax effect of capital structure from the view of events study(2008 tax imputation tax policy changes)and the panel data regression study. Third, a considerated comprehensively, the sample volume is very large. In this paper, the autor took 2000-2009 Shanghai and Shenzhen A-share data into account, and made the analysis on the basis of the the majority of domestic research.This deficiency:the author did not considered industry factors. Paper made regression analysis of data 2000-2009, taking a variety of variables in previous studies into account, and made a stability analysis while changing the variable indicator in accordance with changing of time, changing of mode (the event study for the background of tax reform in 2008). But there is still some disadvantage to improvement of sub-industry research.