S-Based Taxation Under Default Risk

25 Pages Posted: 21 Jul 2005

See all articles by Paolo M. Panteghini

Paolo M. Panteghini

Department of Economics and Management; CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Date Written: July 2005

Abstract

This article studies the characteristics of an S-based tax system under default risk. In particular we show that its neutrality properties depend on whether debt is protected or unprotected. In the former case, this system is neutral. In the latter case, where default timing is optimally chosen by shareholders, the S-based system is neutral with respect to real decisions only if the firm's and the lender's tax rate are equal. However, the shareholders' decision to default is always distorted.

Keywords: capital structure, corporate taxation, neutrality, option pricing

JEL Classification: H25, H32

Suggested Citation

Panteghini, Paolo M., S-Based Taxation Under Default Risk (July 2005). CESifo Working Paper Series No. 1496, Available at SSRN: https://ssrn.com/abstract=759487

Paolo M. Panteghini (Contact Author)

Department of Economics and Management ( email )

Contrada Santa Chiara 50
BRESCIA, BS 25122
Italy

CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.cesifo.de

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