Working Paper: NBER ID: w3092
Authors: Myron S. Scholes; Mark A. Yolfson
Abstract: We explore the degree to which debt financing can reduce the corporate-level tax on income in the U.S.. Although we show that debt is capable of shielding the competitive rate of return on projects from the corporate-level tax, debt financing cannot shield the positive net present value portion of project returns. Since nontax factors preclude corporate activities from being 100% debt-financed, a portion of the competitive return to corporate activity is also subject to double taxation. We also consider alternative mechanisms that serve to convert the corporate tax to a personal tax (or a partnership tax). These include other claims that give rise to tax deductible payments to the corporation such as obligations to employees, lessors and suppliers. As we show, all of these alternatives are limited in their ability to eliminate the corporate-level tax.
Keywords: debt financing; corporate tax; tax shield; partnership tax
JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| debt financing (G32) | corporate-level tax (K34) |
| debt financing (G32) | positive net present value portion of project returns (H43) |
| corporate-level tax (K34) | competitive return (D41) |
| debt financing (G32) | tax-deductible payments (H20) |
| tax-deductible payments (H20) | corporate taxes (H25) |