This paper examines the impact of tax policy on corporate financing decisions using a new empirical method and data set. It finds clear evidence that non-debt tax shields "crowd out" interest deductibility, reducing the desirability of debt issues. Previous studies that failed to find tax effects examined debt-equity ratios rather than individual financing choices. The paper also highlights the importance of controlling for confounding effects. Results show that higher non-debt tax shields (e.g., investment tax credits, tax loss carryforwards) make firms less likely to issue debt. The paper uses a new data source—new public-issue security registrations with the SEC—to analyze financing decisions, providing a large sample of 1418 observations from 1977–1984. The study finds that tax policy significantly affects financing decisions, with tax shields reducing the value of interest deductibility. The paper also discusses other factors, such as asymmetric information, moral hazard, and financial distress, which influence financing decisions. The results provide some of the first clear evidence that tax policy significantly affects corporate financing decisions. The paper concludes that tax effects are most significant for firms approaching financial distress. The study uses an incremental choice approach, which is more statistically powerful than traditional debt-equity ratio analysis, to test the effects of tax policy on financing decisions. The results show that tax shields have a significant negative effect on debt issuance, and that controlling for confounding effects is crucial in understanding the impact of tax policy on corporate financing decisions.This paper examines the impact of tax policy on corporate financing decisions using a new empirical method and data set. It finds clear evidence that non-debt tax shields "crowd out" interest deductibility, reducing the desirability of debt issues. Previous studies that failed to find tax effects examined debt-equity ratios rather than individual financing choices. The paper also highlights the importance of controlling for confounding effects. Results show that higher non-debt tax shields (e.g., investment tax credits, tax loss carryforwards) make firms less likely to issue debt. The paper uses a new data source—new public-issue security registrations with the SEC—to analyze financing decisions, providing a large sample of 1418 observations from 1977–1984. The study finds that tax policy significantly affects financing decisions, with tax shields reducing the value of interest deductibility. The paper also discusses other factors, such as asymmetric information, moral hazard, and financial distress, which influence financing decisions. The results provide some of the first clear evidence that tax policy significantly affects corporate financing decisions. The paper concludes that tax effects are most significant for firms approaching financial distress. The study uses an incremental choice approach, which is more statistically powerful than traditional debt-equity ratio analysis, to test the effects of tax policy on financing decisions. The results show that tax shields have a significant negative effect on debt issuance, and that controlling for confounding effects is crucial in understanding the impact of tax policy on corporate financing decisions.