Should interest expenses be tax deductible?

Sigitas Karpavičius, Fan Yu

Research output: Contribution to journalArticleResearchpeer-review

Abstract

This paper analyzes how shareholder wealth, firm characteristics, and public finance would be impacted if tax deductibility of interest expenses were eliminated. We find that shareholder value would decrease by 3.5%. Under the new regime, firms would be smaller and less levered, would have less productive capital, and would feature lower default probabilities. The effects on aggregate output and employment would be negative. However, the government's revenues from corporate income tax would increase by 3% in the long-run and could be used to partially offset the negative side effects of the reform. The current period of historically low corporate bond yields is probably the best time to change the treatment of interest expenses.

LanguageEnglish
Pages100-116
Number of pages17
JournalEconomic Modelling
Volume54
DOIs
Publication statusPublished - 1 Apr 2016

Fingerprint

Expenses
Tax
Deductibles
Corporate bonds
Firm characteristics
Aggregate output
Bond yields
Shareholder wealth
Public finance
Government revenue
Shareholder value
Default probability
Corporate income tax
Side effects

Keywords

  • Corporate income tax
  • Tax deductibility
  • Interest expenses

Cite this

Karpavičius, Sigitas ; Yu, Fan. / Should interest expenses be tax deductible?. In: Economic Modelling. 2016 ; Vol. 54. pp. 100-116.
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Should interest expenses be tax deductible? / Karpavičius, Sigitas; Yu, Fan.

In: Economic Modelling, Vol. 54, 01.04.2016, p. 100-116.

Research output: Contribution to journalArticleResearchpeer-review

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