Growth and Credit Spreads as Determinants of Taxpayer Wealth and Total Federal Tax Revenue

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Hull, Robert M.
Hull, John B.
Washburn University. School of Business
Kaw Valley Bank
Issue Date
November 2022
Alternative Title
We extend the research of Hull and Hull (2021) on taxpayer wealth and total federal tax revenue (TFTR) under a tax policy that shields retained earnings used for growth from federal taxes. First, we correct the procedure to get firm size adjustment factors used to adjust TFTR based on growth in taxpayer wealth. Second, we update the prior research using 2021 credit spreads. This update is important as credit spreads change over time causing taxpayer wealth and TFTR to change. Using federal tax rates under the Tax Cuts and Jobs Act, we show that switching from an interest tax shield to a retained earnings tax shield increases taxpayer wealth and TFTR together by nearly 9%, lowers the optimal debt-to-firm value ratio by over 8% thereby reducing bankruptcies, and decreases the disparity in ownership taxation without having any real impact on the weighted effective tax rate.