The Debt Tax Shield in General Equilibrium

60 Pages Posted: 27 Jan 2019 Last revised: 30 Jan 2019

See all articles by Marcel Fischer

Marcel Fischer

Copenhagen Business School

Bjarne Astrup Jensen

Copenhagen Business School - Department of Finance

Date Written: January 28, 2019

Abstract

We study the general-equilibrium effects of the corporate debt tax shield in an endowment economy with a redistributive tax system that taxes firm profits and household income and redistributes tax revenues in an attempt to harmonize households' lifetime consumption opportunities. In general equilibrium, the debt tax shield not only affects corporate capital structure and valuation but also causes poorer households to consume more and save less at a younger age. Without the debt tax shield, the same welfare improvements for poorer households are achievable with significantly lower tax rates.

Keywords: debt tax shield, corporate leverage, general equilibrium, endowment economy, redistributive taxation

JEL Classification: G11, E21, H23, H31, H32

Suggested Citation

Fischer, Marcel and Jensen, Bjarne Astrup, The Debt Tax Shield in General Equilibrium (January 28, 2019). Journal of Banking and Finance, 100, 151-166. Available at SSRN: https://ssrn.com/abstract=3312646

Marcel Fischer (Contact Author)

Copenhagen Business School ( email )

Solbjerg Plads 3
Frederiksberg C, DK - 2000
Denmark
+45-3815-3628 (Phone)

Bjarne Astrup Jensen

Copenhagen Business School - Department of Finance ( email )

Solbjerg Plads 3
Frederiksberg, DK-2000
Denmark

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
33
Abstract Views
182
PlumX Metrics