The subsidization of small business through federal credit programs: Analytical foundations

Raymond E. Lombra, Michael Wasylenko, Michael Wasylenko

Research output: Contribution to journalArticlepeer-review

2 Scopus citations


The relationship between federal credit programs and the allocation of financial and real capital has begun to attract more attention as such programs have grown. Defenders of these programs argue that various capital market imperfections necessitate federal credit assistance. Examining the relationship between such imperfections, credit programs and the tax system should facilitate a more careful evaluation of the rationales for and the effects of various alternative policy initiatives. This paper analyzes the optimal taxation of small and large businesses when smaller businesses face higher borrowing costs, whatever the cause. The optimal tax scheme derived here implies a progressive tax applied to all businesses. In the absence of such a progressive tax scheme, federal credit programs for smaller businesses that reduce small business borrowing costs may be viewed as an imperfect substitute. Importantly, the results regarding optimal taxation (subsidization) hold even in the absence of particular capital market imperfections and without resorting to social welfare functions weighting small business output greater than large business output.

Original languageEnglish (US)
Pages (from-to)263-274
Number of pages12
JournalJournal of Economics and Business
Issue number2
StatePublished - May 1984
Externally publishedYes

ASJC Scopus subject areas

  • General Business, Management and Accounting
  • Economics and Econometrics


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