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Article: Interest rates, taxes and corporate financial policies.
- Article from:
- National Tax Journal
- Article date:
- March 1, 2007
- Author:
CopyrightCOPYRIGHT 2007 National Tax Association. This material is published under license from the publisher through the Gale Group, Farmington Hills, Michigan. All inquiries regarding rights should be directed to the Gale Group. (Hide copyright information)
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INTRODUCTION
There has been a substantial literature examining both theoretically and empirically the effects of the tax structure on corporate use of debt vs. equity finance. According to the theoretical literature, debt finance should be encouraged to the degree that more taxes are saved on corporate interest deductions than are owed on the resulting interest income.
Most all past papers on taxes and corporate borrowing, though, ignore an important element in the theory. According to the theory, the size of the net tax savings per dollar of corporate debt is proportional to nominal interest rates. Everything else equal, therefore, the size of the tax ...