Optimal Debt Bias in Corporate Income Taxation

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Optimal Debt Bias in Corporate Income Taxation Abstract 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 higher-return 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-toequity 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 equity-generated income. Terms of use: Documents inJEL-Code: G180, G110, H250, D820.

Influence of Income Taxation on Indebtedness of Non-financial Firms

“…Avšak ekonomicky jsou jak úrok, tak dividenda nákladem kapitálu, a potom neexistuje důvod přistupovat k nim různě, jak uvádí de Mooij (2011b), který pro rozdílné uplatnění úroků a dividend v základu daně nenachází podporu ani v teorii (tržní selhání, teorie kapitálové struktury) ani v praxi (administrativní náklady, omezení na trhu zápůjčního kapitálu nebo přeshraniční mobilita financí). Teoretické podmínky, za jakých by bylo možné daňově zvýhodnit financování dluhové před financováním emisí podílů, probírají Simon (2015) nebo Chorvat (2016).…”

Corporate taxation and financial strategies under asymmetric information

“…They then show that interest rate subsidies and loan guarantees are optimal to correct market equilibrium inefficiency. Simon (2012) has provided an explanation for a government to discriminate between debt and equity financing. Assuming that entrepreneurs are risk-averse, she shows that equity generates more surplus than debt, because it also provides insurance.…”