The effect of debt tax benefits on firm investment decisions

William Addessi and Enrico Saltari

MPRA Paper from University Library of Munich, Germany

Abstract: In this paper we question the idea that the deduction of debt interest is always an effective policy instrument to spur firm investment. We analyze the investment decision in presence of a borrowing constraint on the amount of the debt that the firm can raise. We show that if the debt interest rate is decreasing in the firm capital accumulation and it is available another financial resource more expensive than debt (at least for levels of debt lower than the upper bound), then the deduction of the debt interest from taxes on capital income may reduce firm investment. This theoretical result should be considered when financial intermediaries are not willing to finance beyond a certain threshold but firms have access to other sources of finance.

Keywords: Corporate taxation; Financing constraints; Investment (search for similar items in EconPapers)
JEL-codes: D21 G31 H32 (search for similar items in EconPapers)
Date: 2011-12-17
New Economics Papers: this item is included in nep-acc and nep-pub
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