Summary of Curbing Corporate Debt Bias

Looking for the report?
We have the summary! Get the key insights in just 5 minutes.

Curbing Corporate Debt Bias summary
Start getting smarter:
or see our plans

Rating

8

Qualities

  • Analytical
  • Comprehensive
  • 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.

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.

 

Summary

Elevated levels of corporate debt pose a major threat to the global economy. 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. Despite this risk, the corporate income tax (CIT) systems of most countries motivate firms to rely on debt rather than equity to raise capital. For example, most CIT policies permit businesses to deduct interest on their loans but do not allow them to write off returns on equity. This predilection for corporate borrowing over equity financing results...


More on this topic

By the same authors

Can Government Demand Stimulate Private Investment?
8

Customers who read this summary also read

The Tax Cuts and Jobs Act
8
The Impact of US Tax Reform on Corporate Strategy and M&A
8
Equity Finance and Capital Market Integration in Europe
7
Emerging Market Nonfinancial Corporate Debt
8
Climbing Out of Debt
8
The Value of Debt in Building Wealth
8

Related Channels

Comment on this summary