S-Based Taxation under Default Risk

Paolo Panteghini

Working Papers from University of Brescia, Department of Economics

Abstract: This article studies the characteristics of a S-based tax system under default risk. In particular we show that its neutrality properties depend on whether debt is protected or unprotected. In the former case, this system is neutral. In the latter case, where default timing is optimally chosen by shareholders, the S-based system is neutral with respect to real decisions only if the firm's and the lender's tax rate are equal. However, the shareholders? decision to default is always distorted.

Date: 2005
New Economics Papers: this item is included in nep-fmk and nep-pbe
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Journal Article: S-based taxation under default risk (2006)
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