Welfare effects of business taxation under default risk

Nicola Comincioli (), Paolo Panteghini and Sergio Vergalli
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Nicola Comincioli: University of Brescia

International Tax and Public Finance, 2021, vol. 28, issue 6, No 6, 1412-1429

Abstract: Abstract In this article, we use a stochastic model with a representative firm to study business tax policy under default risk. We will show that, for a given tax rate, tax revenue and welfare are crucially affected by default risk and its costs, as long as interest expenses are deductible. Thus, an evaluation made without accounting for default may be dramatically biased. Moreover, we show that the “debt bias” due to the tax treatment of debt finance causes a quite relevant deadweight loss.

Keywords: Capital structure; Default risk; Business taxation and welfare (search for similar items in EconPapers)
JEL-codes: G33 G38 H25 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:kap:itaxpf:v:28:y:2021:i:6:d:10.1007_s10797-020-09650-1

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DOI: 10.1007/s10797-020-09650-1

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