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http://ssrn.com/abstract=2190966
 
 

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Capping the Deductibility of Corporate Interest Expense


Bob Pozen


Harvard Business School

Lucas W. Goodman


Harvard Business School

2012

Tax Notes, Vol. 137, 2012

Abstract:     
Robert C. Pozen is a senior fellow at the Brookings Institution and a senior lecturer at Harvard Business School. Lucas W. Goodman is a research assistant for Pozen. The authors are grateful to Alan Auerbach, Ted Buerger, Marc Goldwein, Don Marron, Jim Poterba, Richard Skillman, Alvin Warren, and Matthew Weinzierl for their helpful comments on previous drafts.

Many lawmakers have indicated support for reducing the statutory corporate tax rate from 35 to 25 percent on a revenue-neutral basis. However, they have not made clear how they would broaden the base enough to pay for that rate reduction. This report proposes a specific approach for revenue neutral corporate tax reform: limiting the tax deductibility of interest expense for C corporations. That would significantly reduce the tax code’s bias in favor of debt-financed investment relative to equity-financed investment, while keeping the overall cost of capital roughly the same.

The authors propose reform that lowers the corporate tax rate from 35 to 25 percent and allows nonfinancial C corporations to deduct only 65 percent of their interest expense, with special treatment for the financial sector and for companies that would have otherwise realized taxable losses. Based on a static analysis of aggregate data between 2000 and 2009, the authors calculate that the revenue loss from lowering the corporate tax rate to 25 percent would have been about the same as the revenue gain from their proposed limits on interest deductions.

Number of Pages in PDF File: 18

Keywords: corporate tax reform, debt bias, interest deductions

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Date posted: December 19, 2012  

Suggested Citation

Pozen, Bob and Goodman, Lucas W., Capping the Deductibility of Corporate Interest Expense (2012). Tax Notes, Vol. 137, 2012. Available at SSRN: http://ssrn.com/abstract=2190966

Contact Information

Bob Pozen (Contact Author)
Harvard Business School ( email )
Soldiers Field Road
Morgan 270C
Boston, MA 02163
United States
Lucas W. Goodman
Harvard Business School ( email )
Soldiers Field Road
Morgan 270C
Boston, MA 02163
United States
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