Is leverage a tax dodge--or not?

Yolanda K. Henderson

New England Economic Review, 1990, issue Mar, 11-32

Abstract: In passing the Tax Reform Act of 1986, policymakers wanted to ensure that corporations would pay their fair share of tax. Congress broadened the corporate tax base, rescinded the investment tax credit, and instituted a new minimum tax. The issue of adequate tax payments has not gone away, however, because corporations have been taking larger interest deductions as a result of having substituted debt for equity on their balance sheets. ; This study begins by measuring the aggregate tax consequences of corporate leverage decisions. It also examines the tax implications of recent transactions in which corporations effectively increased their leverage, not by changing their financing of new investment projects, but by reducing their outstanding net worth. The author argues that policymakers concerned with stemming further revenue losses should look to responses other than outlawing certain controversial forms of restructuring or restricting interest deductions that appear to be excessive. At most, they should consider altering tax laws to provide more neutral treatment of income from debt and equity capital.

Keywords: Financial leverage; Taxation; Corporations - Finance (search for similar items in EconPapers)
Date: 1990
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.bostonfed.org/economic/neer/neer1990/neer290b.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fip:fedbne:y:1990:i:mar:p:11-32

Ordering information: This journal article can be ordered from

Access Statistics for this article

More articles in New England Economic Review from Federal Reserve Bank of Boston Contact information at EDIRC.
Bibliographic data for series maintained by Catherine Spozio ().