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Optimal Debt Bias In Corporate Income Taxation
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Book Synopsis Optimal Debt Bias in Corporate Income Taxation by : Jenny Simon
Download or read book Optimal Debt Bias in Corporate Income Taxation written by Jenny Simon and published by . This book was released on 2012 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: I present a rationale for a government to discriminate between debt and equity financing when taxing corporate income. For risk-averse entrepreneurs, equity generates more surplus than debt, because it provides financing and insurance. A government seeking to extract surplus from entrepreneurs would naturally tax equity-generated income more than debt-generated income. I also establish a less obvious reason why the government might want to extract surplus from entrepreneurs. It is well understood that when the quality of projects is unobservable to investors, risk-averse entrepreneurs with higherreturn projects might retain a larger share of equity to signal their type (Leland and Pyle (1977)). I show that in such an adverse selection setting, while competitive investors are constrained to offer actuarially fair terms, the government can use taxes to discriminate between types. This degree of freedom allows manipulation of the relevant incentive constraints so that a lower level of debt suffices for separation, and an increase in overall efficiency can be obtained. Since entrepreneurs separate along their debt-to-equity ratios, the optimal non-linear tax schedule to achieve the desired discrimination is isomorphic to one that taxes debt-generated income at a lower rate than equitygenerated income.
Book Synopsis Curbing Corporate Debt Bias by : Ruud A. de Mooij
Download or read book Curbing Corporate Debt Bias written by Ruud A. de Mooij and published by International Monetary Fund. This book was released on 2017-01-30 with total page 20 pages. Available in PDF, EPUB and Kindle. Book excerpt: Tax provisions favoring corporate debt over equity finance (“debt bias”) are widely recognized as a risk to financial stability. This paper explores whether and how thin-capitalization rules, which restrict interest deductibility beyond a certain amount, affect corporate debt ratios and mitigate financial stability risk. We find that rules targeted at related party borrowing (the majority of today’s rules) have no significant impact on debt bias—which relates to third-party borrowing. Also, these rules have no effect on broader indicators of firm financial distress. Rules applying to all debt, in contrast, turn out to be effective: the presence of such a rule reduces the debt-asset ratio in an average company by 5 percentage points; and they reduce the probability for a firm to be in financial distress by 5 percent. Debt ratios are found to be more responsive to thin capitalization rules in industries characterized by a high share of tangible assets.
Book Synopsis Taxation and the Optimal Constraint on Corporate Debt Finance by : Peter Birch Sørensen
Download or read book Taxation and the Optimal Constraint on Corporate Debt Finance written by Peter Birch Sørensen and published by . This book was released on 2014 with total page 39 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Tax Biases to Debt Finance by : Ruud A. de Mooij
Download or read book Tax Biases to Debt Finance written by Ruud A. de Mooij and published by International Monetary Fund. This book was released on 2011-05-03 with total page 25 pages. Available in PDF, EPUB and Kindle. Book excerpt: Staff Discussion Notes showcase the latest policy-related analysis and research being developed by individual IMF staff and are published to elicit comment and to further debate. These papers are generally brief and written in nontechnical language, and so are aimed at a broad audience interested in economic policy issues. This Web-only series replaced Staff Position Notes in January 2011.
Book Synopsis Debt Bias and Other Distortions by : International Monetary Fund. Fiscal Affairs Dept.
Download or read book Debt Bias and Other Distortions written by International Monetary Fund. Fiscal Affairs Dept. and published by International Monetary Fund. This book was released on 2009-12-06 with total page 41 pages. Available in PDF, EPUB and Kindle. Book excerpt: Tax distortions are likely to have encouraged excessive leveraging and other financial market problems evident in the crisis. These effects have been little explored, but are potentially macro-relevant. Taxation can result, for example, in a net subsidy to borrowing of hundreds of basis points, raising debt-equity ratios and vulnerabilities from capital inflows. This paper reviews key channels by which tax distortions can significantly affect financial markets, drawing implications for tax design once the crisis has passed.
Book Synopsis The Tax Elasticity of Corporate Debt by : Ruud A. de Mooij
Download or read book The Tax Elasticity of Corporate Debt written by Ruud A. de Mooij and published by International Monetary Fund. This book was released on 2011-04-01 with total page 29 pages. Available in PDF, EPUB and Kindle. Book excerpt: Although the empirical literature has long struggled to identify the impact of taxes on corporate financial structure, a recent boom in studies offers ample support for the debt bias of taxation. Yet, studies differ considerably in effect size and reveal an equally large variety in methodologies and specifications. This paper sheds light on this variation and assesses the systematic impact on the size of the effects. We find that, typically, a one percentage point higher tax rate increases the debt-asset ratio by between 0.17 and 0.28. Responses are increasing over time, which suggests that debt bias distortions have become more important.
Book Synopsis Debt Bias in Corporate Income Taxation and the Costs of Banking Crises by : Sven Langedijk
Download or read book Debt Bias in Corporate Income Taxation and the Costs of Banking Crises written by Sven Langedijk and published by . This book was released on 2015 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: Corporate income taxation (CIT) in most countries favors debt over equity financing, leading to over-indebtedness. This problem is particularly acute for the financial sector. We estimate financial-stability benefits of eliminating this debt bias. We estimate the long-run effects of CIT on bank leverage and, using a Vasicek-based model of banking crisis losses, we find that eliminating this debt bias could reduce public finance losses in the range of 30 to 70%. These results hold even for conservative estimates of bank-leverage and portfolio-risk effects of CIT changes.
Book Synopsis Pouring Oil on Fire: Interest Deductibility and Corporate Debt by : Pietro Dallari
Download or read book Pouring Oil on Fire: Interest Deductibility and Corporate Debt written by Pietro Dallari and published by International Monetary Fund. This book was released on 2018-12-07 with total page 42 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper investigates the role of tax incentives towards debt finance in the buildup of leverage in the nonfinancial corporate (NFC) sector, using a large firm-level dataset. We find that so-called debt bias is a significant driver of leverage, for both small and medium-sized enterprises and larger firms, with its effect accounting for about a quarter of leverage. The strength of this effect differs with firm size, the availability of collateral, income and income volatility, cash flow, and capital intensity. We conclude that leveling the playing field between debt and equity finance through tax policy reform would decrease NFC leverage, reducing economic risks posited by leverage.
Book Synopsis Tax Policy, Leverage and Macroeconomic Stability by : International Monetary Fund. Fiscal Affairs Dept.
Download or read book Tax Policy, Leverage and Macroeconomic Stability written by International Monetary Fund. Fiscal Affairs Dept. and published by International Monetary Fund. This book was released on 2016-12-10 with total page 78 pages. Available in PDF, EPUB and Kindle. Book excerpt: Risks to macroeconomic stability posed by excessive private leverage are significantly amplified by tax distortions. ‘Debt bias’ (tax provisions favoring finance by debt rather than equity) has increased leverage in both the household and corporate sectors, and is now widely recognized as a significant macroeconomic concern. This paper presents new evidence of the extent of debt bias, including estimates for banks and non-bank financial institutions both before and after the global financial crisis. It presents policy options to alleviate debt bias, and assesses their effectiveness. The paper finds that thin capitalization rules restricting interest deductibility have only partially been able to address debt bias, but that an allowance for corporate equity has generally proved effective. The paper concludes that debt bias should feature prominently in countries’ tax reform plans in the coming years.
Author :Comisión Europea. Dirección General de Asuntos Económicos y Financieros Publisher : ISBN 13 :9789279254192 Total Pages :21 pages Book Rating :4.2/5 (541 download)
Book Synopsis The Debt-equity Tax Bias by : Comisión Europea. Dirección General de Asuntos Económicos y Financieros
Download or read book The Debt-equity Tax Bias written by Comisión Europea. Dirección General de Asuntos Económicos y Financieros and published by . This book was released on 2012 with total page 21 pages. Available in PDF, EPUB and Kindle. Book excerpt: The tax deductibility of interest payments in most corporate income tax systems coupled with no such measure for equity financing creates economic distortions and exacerbates leverage. This paper discusses the consequences of this debt bias and the possible remedies.
Author :S. Rao Aiyagari Publisher :London : Department of Economics, University of Western Ontario ISBN 13 : Total Pages :36 pages Book Rating :4.:/5 (318 download)
Book Synopsis Optimal Capital Income Taxation and Long Run Debt with Borrowing Constraints by : S. Rao Aiyagari
Download or read book Optimal Capital Income Taxation and Long Run Debt with Borrowing Constraints written by S. Rao Aiyagari and published by London : Department of Economics, University of Western Ontario. This book was released on 1991 with total page 36 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Financial Sector Debt Bias by : Ms.Oana Luca
Download or read book Financial Sector Debt Bias written by Ms.Oana Luca and published by International Monetary Fund. This book was released on 2016-11-10 with total page 28 pages. Available in PDF, EPUB and Kindle. Book excerpt: Most tax systems create a tax bias toward debt finance. Such debt bias increases leverage and may negatively affect financial stability. This paper models and estimates debt bias in the financial sector, and present novel estimates for investment banks and non-bank financial intermediaries such as finance and insurance companies. We find debt bias to be pervasive, explaining as much as 10 percent of total leverage for regular banks and 20 percent for investment banks, with the effects most pronounced before the global financial crisis. Going forward, debt bias is likely to once again gain prominence as a key driver of leverage decisions, underscoring the importance of policy reform at this juncture.
Book Synopsis Quantitative Implications of the Home Bias by : Assaf Razin
Download or read book Quantitative Implications of the Home Bias written by Assaf Razin and published by . This book was released on 1997 with total page 38 pages. Available in PDF, EPUB and Kindle. Book excerpt: There is strong evidence about a home-court advantage in international portfolio" investment. One explanation for the bias is an information asymmetry between domestic and" foreign investors about the economic performance of domestic firms. This asymmetry causes" two types of distortions: an aggregate production inefficiency and a production-consumption" inefficiency, leading to foreign underinvestment and domestic oversaving respectively. Such" market failures are found to be quite severe, slightly more so with equity flows than with debt" flows. These inefficiencies can nonetheless be corrected by a mix of tax-subsidy instruments consisting of taxes on corporate income and on the capital incomes of both residents and" nonresidents. When only a partial set of instruments is available, however each tax instrument can change radically and may even be reversed although the welfare gains" can be fairly substantial and sometimes close to the first best optimum. This partial set of" instruments appears to be more effective in handling the market failure in the case of equity" flows than in the case of debt flows.
Book Synopsis Taxes and Corporate Financing Decisions - Evidence from the Belgian Ace Reform by : Nils aus dem Moore
Download or read book Taxes and Corporate Financing Decisions - Evidence from the Belgian Ace Reform written by Nils aus dem Moore and published by . This book was released on 2015 with total page 73 pages. Available in PDF, EPUB and Kindle. Book excerpt: We contribute to the empirical literature on the debt bias of corporate income taxation through a micro-econometric evaluation of the so-called ACE corporate tax reform in Belgium based on firm-level accounting data. We interpret the tax reform that came into effect in January 2006 as an economic quasi experiment. We identify its causal impact on the leverage ratio of Belgian corporations by means of a difference-in-differences (DiD) approach, using corporations from the UK as comparison group. Our results document that the ACE reform led to a systematic pattern of heterogeneous effects on the capital structure of Belgian corporations, as the estimated reduction of the leverage ratio is most pronounced for big firms. Estimation of quantile treatment effects further reveals that reform effects get monotonically larger across the distribution of firm leverage. Finally, we provide evidence of sectoral heterogeneity with significant effects observed for capital-intensive but not for labor-intensive sectors.
Book Synopsis Addressing the Debt-equity Bias Within a Common Consolidated Corporate Tax Base (CCCTB) : Possibilities, Impact on Effective Tax Rates and Revenue Neutrality by : C. Spengel
Download or read book Addressing the Debt-equity Bias Within a Common Consolidated Corporate Tax Base (CCCTB) : Possibilities, Impact on Effective Tax Rates and Revenue Neutrality written by C. Spengel and published by . This book was released on 2018 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: Corporate tax systems encourage the use of debt rather than equity finance. This corporate debt bias is a matter of concern in light of its implications for macrofinancial stability. In October 2016, the European Commission addressed the issue in its relaunched proposal of a Common (Consolidated) Corporate Tax Base (CC(C)TB). Various reform options to alleviate the debt bias and increase financing neutrality of tax systems exist. Whether such reforms are indeed effective from the point of view of EU Member States depends on how they interact with the specific local tax codes. Based on the well-established indicators of the effective tax burden of companies according to the Devereux/Griffith methodology, this paper analyses the impact of four fundamental tax reform options on financing neutrality in each EU Member State. The results show that all fundamental tax reform options largely establish financing neutrality in the EU Member States but considerably differ in their consequences for corporate investment.
Book Synopsis Debt-equity Bias Should be Addressed on National Rather Than on EU Level by : Christoph Spengel
Download or read book Debt-equity Bias Should be Addressed on National Rather Than on EU Level written by Christoph Spengel and published by . This book was released on 2021 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: The economic crisis following the COVID-19 pandemic has increased the debt levels of corporations and reduced the level of investments. From a tax perspective, interest payments on debt are generally deductible from the corporate tax base, while costs related to equity are not. This debt-equity bias is a deep-rooted issue in today's tax system and inhibits equity-financed investments. From a microeconomic perspective, the bias leads to socially undesirable inefficiencies in capital markets, resulting in welfare losses. From a macroeconomic point of view, high debt levels hinder economic growth. To provide a stable and supportive tax environment for a sustainable recovery after the corona crisis, the European Commission has published a framework on "Business Taxation for the 21st Century" in May 2021. Besides other (long-term) proposals, a debt equity bias reduction allowance (DEBRA) should be developed to address the tax-induced distortions of debt financing. For a legislative proposal, the European Commission identified three possible concepts: First, a Comprehensive Business Income Tax (CBIT) that disallows the tax-deductibility of any financing cost. Second, an Allowance for Corporate Equity (ACE) that provides for the deductibility of notional interest on either all equity or new equity. And third, an alignment of the treatment of debt and equity financing by deducting a notional return on all capital, namely an Allowance for Corporate Capital (ACC).
Book Synopsis A Destination-Based Allowance for Corporate Equity by : Shafik Hebous
Download or read book A Destination-Based Allowance for Corporate Equity written by Shafik Hebous and published by International Monetary Fund. This book was released on 2018-11-08 with total page 26 pages. Available in PDF, EPUB and Kindle. Book excerpt: Following renewed academic and policy interest in the destination-based principle for taxing profits—particularly through a destination-based cash flow tax (DBCFT)—this paper studies other forms of efficient destination-based taxes. Specifically, it analyzes the Destination-Based Allowance for Corporate Equity (DBACE) and Allowance for Corporate Capital (DBACC). It describes adjustments that are required to turn an origin into a destination-based versions of these taxes. These include adjustments to capital and equity, which are additional to the border adjustments needed under a DBCFT. The paper finds that the DBACC and DBACE reduce profit shifting and tax competition, but cannot fully eliminate them, with the DBACE more sensitve than the DBACC. Overall, given the potential major political cost of switching from an origin to a destination-based tax system, we conclude that advantages of the DBCFT are likely to outweigh the transitional advantages of the DBACE/DBACC.
