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.
In this summary, you will learn
- How national tax codes induce a “debt bias” into corporate decisions,
- Why countries need to consider adopting “thin capitalization rules” to address this issue, and
- How these rules will reduce the incidence of corporate and systemic financial duress.
About the Authors
Ruud de Mooij is chief of the IMF’s tax policy division, where Shafik Hebous is an economist.