Business Wealth and Tax Policy

Abstract

We extend capital structure model (CSM) research by presenting equations to determine the maximum firm value for all for-profit organizations (FPOs) where FPOs contain the two major ownership forms of C corps and pass-throughs. These equations include the first CSM equations derived for pass-throughs and new equations based on tax policy reform that makes business growth cheaper. These equations enable practitioners (managers, researchers, government officials) to balance the maximization of business wealth with increased federal tax revenue. The importance of these new and innovative equations for business and government decision-making include the following. First, they help practitioners understand the role of growth and leverage in wealth maximization. Second, they demonstrate the consequences of tax rate changes under the Tax Cuts and Jobs Act (TCJA). Third, they offer potential for financial innovations by guiding practitioners on what to expect when there is a change not only in growth and tax rates but also when there is an overhaul in tax policy that serves to lower the cost of growth.