Abstract
In this paper, we study the optimal investment and financing decisions with private lending and a newly created bank-tax-interaction(BTI, henceforth) which the bank provides loan to small and micro enterprizes (SMEs, henceforth) based on theirs historical tax payment. In contrast to the case with pure private lending, we discover that the BTI can increase firms’ value, the tax revenue and accelerate investment, firms with more profitable growth opportunities and higher cost of private lending will benefit more from BTI financing. Furthermore, an increasing in the credit multiplier reduces the incentive for corporate tax evasion when the minimum degree of tax payment is higher.
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