The influence of firms' financial policy on tax reform

The effectiveness of proposed reforms to the tax system intended to stimulate investment depends on how capital structure affects corporate behaviour. A dynamic general equilibrium model, calibrated for the UK, is used to investigate the difference between three models of financial structure, including one of endogenous structure motivated by agency theory. It is shown that the difference in predicted effects can be significant, and that the impact of the reform on the marginal source of funds is crucial.