NBER Study Links Corporate Tax Rates to Financial Distress and Capital Structure

A new National Bureau of Economic Research working paper by Mara Faccio and Stefano Manfredonia examines the relationship between corporate taxes and financial distress using establishment-level data. The study employs a border discontinuity design to demonstrate that higher corporate income tax rates significantly increase financial distress, particularly for geographically concentrated firms, with notable spillover effects across establishments. Furthermore, the authors investigate the impact of the 2017 Tax Cuts and Jobs Act, specifically its interest limitation rule, using a difference-in-differences approach. They find that firms affected by this rule experienced a decline in financial distress. This reduction is attributed to the decreased tax advantage of debt, which incentivizes firms to deleverage. Consequently, these capital structure adjustments help mitigate financial distress. The research provides critical insights into how tax policy influences corporate financial health and strategic decision-making regarding debt and leverage. Published in April 2026, this working paper contributes to the fields of financial economics, corporate finance, and public economics, offering empirical evidence on the unintended consequences of tax regulations on firm stability.