The Debt-Equity Distinction in a Second-Best World

105 Pages Posted: 2 Nov 2000  

Katherine Pratt

Loyola Law School Los Angeles

Abstract

Economic and legal commentators and the Treasury Department have made various proposals to eliminate the debt-equity distinction in the tax law. The theory of the second best posits that eliminating an economic distortion does not necessarily increase efficiency if other economic distortions remain. Policymakers cannot simply assume that eliminating the distortionary debt-equity distinction will automatically increase efficiency because other distortions in the income tax will remain. This Article evaluates a number of the proposals to eliminate the debt-equity distinction, taking into account numerous distortions that are likely to remain in our tax system.

Suggested Citation

Pratt, Katherine, The Debt-Equity Distinction in a Second-Best World. Vanderbilt Law Review, Vol. 53, No. 4, p. 1055, 2000; Loyola-LA Legal Studies Paper No. 2006-35. Available at SSRN: https://ssrn.com/abstract=239891

Katherine Pratt (Contact Author)

Loyola Law School Los Angeles ( email )

919 Albany Street
Los Angeles, CA 90015-1211
United States
213-736-8163 (Phone)
213-380-3769 (Fax)

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