Pouring Oil on Fire: Interest Deductibility and Corporate Debt

43 Pages Posted: 14 Jan 2019

See all articles by Pietro Dallari

Pietro Dallari

International Monetary Fund (IMF); European Central Bank (ECB)

Nicolas End

International Monetary Fund (IMF)

Fedor Miryugin

International Monetary Fund (IMF)

Alexander F. Tieman

International Monetary Fund (IMF)

Reza Yousefi

International Monetary Fund (IMF)

Date Written: December 2018

Abstract

This paper investigates the role of tax incentives towards debt finance in the buildup of leverage in the nonfinancial corporate (NFC) sector, using a large firm-level dataset. We find that so-called debt bias is a significant driver of leverage, for both small and medium-sized enterprises and larger firms, with its effect accounting for about a quarter of leverage. The strength of this effect differs with firm size, the availability of collateral, income and income volatility, cash flow, and capital intensity. We conclude that leveling the playing field between debt and equity finance through tax policy reform would decrease NFC leverage, reducing economic risks posited by leverage.

Keywords: Tax incentives, Tax policy, Corporate debt, Corporate income taxes, Leverage, Debt Bias, Corporate Income Tax, SMEs, Micro data, Business Taxes and Subsidies, Incidence, Firm Behavior: Empirical Analysis

JEL Classification: H25, H22, D22, G32, H32

Suggested Citation

Dallari, Pietro and End, Nicolas and Miryugin, Fedor and Tieman, Alexander F. and Yousefi, Reza, Pouring Oil on Fire: Interest Deductibility and Corporate Debt (December 2018). IMF Working Paper No. 18/257, Available at SSRN: https://ssrn.com/abstract=3314590

Pietro Dallari (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Nicolas End

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Fedor Miryugin

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Alexander F. Tieman

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

Reza Yousefi

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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