Do Personal Taxes Destroy Tax Shields? A Critique to Miller’s (1977) Paper

30 Pages Posted: 1 Oct 2015 Last revised: 28 Aug 2017

See all articles by Ignacio Velez-Pareja

Ignacio Velez-Pareja

Grupo Consultor CAV Capital Advisory & Valuation

Date Written: August 26, 2017

Abstract

La versión española de este artículo se puede encontrar en: http://ssrn.com/abstract=2685207.

We discuss the relevance of personal taxes on Tax Shields. Interest and taxes are the basis for defining an optimal capital structure. When personal taxes are greater than or equal to TS an optimal capital structure will not exist.

We suggest that the approach proposed by Miller (1977) might understate the effect of personal taxes in the net TS and/or its associated net value. We consider the irrelevance of personal taxes on interest received by debtholders on the value of TS earned by the firm on interest paid. We conclude that Miller’s approach might be wrong and has some inconsistencies.

Keywords: Debt Tax Shields, personal taxes, value of tax shields, optimal capital structure

JEL Classification: E62, G12, G32, M21

Suggested Citation

Velez-Pareja, Ignacio, Do Personal Taxes Destroy Tax Shields? A Critique to Miller’s (1977) Paper (August 26, 2017). Emerging Markets Finance and Trade, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2667127 or http://dx.doi.org/10.2139/ssrn.2667127

Ignacio Velez-Pareja (Contact Author)

Grupo Consultor CAV Capital Advisory & Valuation ( email )

Ave Miramar # 18-93 Apt 6A
Cartagena
Colombia
+573112333074 (Phone)

HOME PAGE: http://cashflow88.com/decisiones/decisiones.html

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