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Curbing Corporate Debt Bias
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Curbing Corporate Debt Bias

Do Limitations to Interest Deductibility Work? CESifo Working Paper No. 6312

Ruud de Mooij and Shafik Hebous
CESifo Group Munich, 2017
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Editorial Rating

8

Qualities

  • Comprehensive
  • Analytical
  • Innovative

Recommendation

Most nations’ corporate tax frameworks induce companies to favor debt over equity for investing and capital raising purposes. Firms can deduct interest expenses from their taxes but not equity returns. This “debt bias” unleashes enormous consequences both for corporate strategies and for systemic risk to financial markets. Policy experts Ruud de Mooij and Shafik Hebous analyze whether changes to tax regulations succeed in reducing corporate debt-to-asset ratios and in improving firms’ financial stability. getAbstract recommends this detailed and leading-edge report to executives interested in the regulatory and strategic impacts of tax deductibility and equity accounting.

Take-Aways

  • During a financial crisis, companies that are highly leveraged are more likely to cut jobs and plunge into bankruptcy than are firms with lower levels of debt.
  • By permitting the deduction of loan interest, the corporate income tax systems of most countries encourage a “debt bias” among companies.
  • An “allowance for corporate equity” provision in the tax code would make equity as deductible as interest, thereby reducing firms’ proclivity to borrow.

About the Authors

Ruud de Mooij is chief of the IMF’s tax policy division, where Shafik Hebous is an economist.

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