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In this paper the impact of fiscal policy is analyzed within the context of an endogenous growth and cycles model. The investigation shows the different situations in which government expenditure can lead to both crowding-in and crowding-out of output and employment. With regard to the cycle, an increase in the share of government spending leads to an expansion of output, which is given a greater stimulus with a higher degree of monetization. Expansionary monetary policies accompanying the fiscal expansion tend to make the upswing longer and the downswing more shallow, i.e., the cycle becomes more asymmetric. The medium-run dynamics of the model along its warranted growth path essentially rest on the relative movements of business retained earnings (i.e., the private savings rate since household savings are ignored) and the government spending share. With the private savings rate fixed, a rise in the government spending share leads to medium-run crowding-out. On the other hand, if policies such as investment tax credits, lower rates of corporate taxation, and accelerated deductions for capital depreciation stimulate the growth of the business retained earnings, then an increase in the government spending share may either not have any effect on the warranted path or may even raise it, i.e., there might be crowding-in. Moreover, abstracting from any changes in retained earnings, an increase in the level of government spending produces an expansionary cyclical effect with no medium-run crowding-out. Finally, the model exploits the empirical finding that infrastructure investment by the government lowers business costs. This relationship is used to demonstrate that the warranted growth path can be increased via a shift from government consumption expenditures to infrastructure investment. In contrast to mainstream analyses these complex results imply that, within limits, the state has a number of policy levers at its disposal to regulate output and employment.

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This paper raises questions about austerity policies by investigating the effects of the state's tax and expenditure policies on the warranted growth rate. It proposes two mechanisms to raise the warranted growth rate in the event that there is long-run unemployment. First, it incorporates Pasinetti's taxation function into Harrod's growth framework to show how, with an unbalanced budget, an increase in any kind of tax rate, including the tax rate on profits, will raise the warranted path. Such a policy can be accompanied by an increase in aggregate government spending. Second, by introducing a public investment function and, following Keynes, by assuming that the government's expenditures are split into a current and a capital budget, it shows that an increase in capacity-augmenting investment by state enterprises can also raise the warranted path. In other words, judicious tax and expenditure policies provide the basis for increases in government spending, including a greater degree of capacity-augmenting public investment. The paper thus formalizes Keynes's proposals regarding the socialization of investment and shows how this can be accomplished via appropriate compositional changes in government spending and taxation policies.

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Source: Schepens (2014) “Taxes and bank capital structure”, Figure 1When aiming at establishing tax neutrality between debt and equity, two main measures have been proposed: (1) an Allowance for Corporate Equity (ACE); and (2) a Comprehensive Business Income Tax (CBIT).A number of countries, for example Belgium, Brazil, Italy, and Latvia have introduced an . ACE systems mitigate the tax preference of debt over equity by allowing companies to deduct a notional interest rate on their corporate equity (). For the Belgian case, ) shows that the introduction of an ACE led to a reduction in leverage. confirm that nonfinancial firms - especially large and new ones – have become better capitalized in response to the reduction in the tax preference of debt. finds that leverage of nonfinancial firms declined by 2-7%. note that the Belgian ACE reduced leverage of multinational affiliates by 3-5 percentage points. In contrast, ) argues that, in Brazil, the introduction of a similar system led to higher dividend payments and an increase (instead of a fall) in debt-equity ratios, with dividends being paid through increasing debt. Nonetheless, this may be due to the peculiarities of the Brazilian tax system.Regarding the effects of an ACE on financial firms, presents evidence that, following the introduction of an ACE in 2005, Belgian banks increased their equity ratios relative to other European banks (Figure 2). Since the ACE works as a tax shield for equity, it makes equity funding more attractive. It is important to note that it does not increase equity ratios by merely decreasing lending activities, which would negatively affect the real sector. Moreover, the tax relief for equity reduced banks’ risk taking incentives, especially for the weakly capitalized banks (). Due to its immediate impact on financial stability, argues that an ACE seems even more promising in the banking sector than in the nonfinancial sector.Yet, the introduction of an ACE also brings about complications: it narrows the tax base. If the resulting loss of revenue needs to be compensated for, increasing corporate income taxes could be an option. This, in turn, is a disadvantage for the country introducing the novel system in a globalized world where capital is internationally mobile (). Possibilities to reduce revenue losses could include international tax coordination or limiting the allowance to equity, as in Italy ().Alternatively, the deductibility of interest paid on debt could be abolished under a . In this case, the tax base increases, such that corporate income tax rates could potentially be lowered (). However, denying the tax-deductibility of interest payments could have negative effects on investment in the short term, as it makes debt-financing more expensive.Several countries have implemented tax rules in the spirit of CBIT. For example, according to , about two-thirds of OECD countries have applied that restrict interest-deductibility for firms with high leverage. The authors find that these rules have helped to reduce the leverage of multinationals’ subsidiaries. stress that these capitalization rules are only effective if restrictions are automatic and do not allow for government interventions. Following a similar logic, aim at limiting interest deductibility when net interest expenses exceed a certain threshold. They are applied in several European countries (a, , ).

To mitigate the tax preference of debt over equity, several measures have been put forward. Building on the observation that corporate leverage increases with the tax rate, a first suggestion is to cut corporate tax rates (). This would decrease the value of the tax shield for debt. Yet, evidence from the US suggests that while corporate leverage significantly rises in response to tax increases, it does not respond to tax cuts (). Consequently, cutting tax rates may not effectively reduce leverage.

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Alternatively, the deductibility of interest paid on debt could be abolished under a . In this case, the tax base increases, such that corporate income tax rates could potentially be lowered (). However, denying the tax-deductibility of interest payments could have negative effects on investment in the short term, as it makes debt-financing more expensive.

To mitigate the tax preference of debt over equity, several measures have been put forward. Building on the observation that corporate leverage increases with the tax rate, a first suggestion is to cut corporate tax rates (). This would decrease the value of the tax shield for debt. Yet, evidence from the US suggests that while corporate leverage significantly rises in response to tax increases, it does not respond to tax cuts (). Consequently, cutting tax rates may not effectively reduce leverage.Figure 2: Evolution of the equity ratio for Belgian banks and the control group of banks

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Cite this article as: Regoniel, Patrick A

Empirical analyses suggest a sizable impact of taxation on firms’ capital structure, both in the nonfinancial and financial sectors (, ). Overall, the literature identifies a positive link between corporate income tax rates and leverage. Summarizing information from 19 empirical studies, concludes that the median tax elasticity of corporate leverage is 0.5, meaning that a 10% increase in the corporate tax rate (e.g. from 30 to 33%) leads to a 5% increase in leverage (e.g. from 60 to 63%).

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Empirical analyses suggest a sizable impact of taxation on firms’ capital structure, both in the nonfinancial and financial sectors (, ). Overall, the literature identifies a positive link between corporate income tax rates and leverage. Summarizing information from 19 empirical studies, concludes that the median tax elasticity of corporate leverage is 0.5, meaning that a 10% increase in the corporate tax rate (e.g. from 30 to 33%) leads to a 5% increase in leverage (e.g. from 60 to 63%). Figure 1: Debt bias of taxation and the probability of crisis

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Successful leaders have to conceive, author, rebuild, pivot, differentiate, and finally maintain a personal reputation to make a lasting, recognizable and powerful identity. Reputation Management will explore how you can effectively communicate to create, adapt and maintain your personal reputation. Your reputation remains fluid as you navigate your career decisions and interact with different professionals along your journey. nnThe course is designed along three interlocking elements: reputation management literature, relevant case studies, and curated guest speakers. Students will learn the fundamentals of strategic corporate communication and the risk of not managing reputation effectively. These frameworks will be extended with specific case studies to illustrate where individuals, groups, and firms have faced the challenge of managing reputation effectively. We will focus on both traditional and virtual components of communication including the relevancy of online reputation management. Finally we will invite well-known leaders from a range of industries who have built and sustained their reputations, through effective communication. Each leader has had to manage their reputations in the public eye, and alongside their peers, supervisors, and employees. Guests will be invited to discuss their conscious and unplanned strategies of how to successfully communicate the kind of person, leader, innovator, or public figure they strive to be. nnStudents will benefit from a rich blend of frameworks, cases, and speakers enabling them to successfully enter the work force and create their own, personal reputations. Students will create a case study drawn from their own experience (or personal network), of a reputation dilemma. A final assignment requires students to research their own reputation history by projecting what they think their reputation is, creating their own survey for friends, colleagues and employers to take, conduct three interviews about their personal reputation with three individuals who have worked closely with them, and then synthesize all this feedback into a cohesive paper and short video that reflects their authentic work and personal reputation. Throughout the course students will post at least one blog drawn from class concepts and respond to posts by peers in the class.

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