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S-Based Taxation under Default Risk

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  • Paolo Panteghini

Abstract

This article studies the characteristics of a 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.

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Bibliographic Info

Paper provided by University of Brescia, Department of Economics in its series Working Papers with number ubs0506.

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Date of creation: 2005
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Handle: RePEc:ubs:wpaper:ubs0506

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References

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  1. Hayne E. Leland., 1994. "Corporate Debt Value, Bond Covenants, and Optimal Capital Structure," Research Program in Finance Working Papers RPF-233, University of California at Berkeley.
  2. Steve Bond & Michael Devereux, 1999. "Generalised R-based and S-based taxes under uncertainty," IFS Working Papers W99/09, Institute for Fiscal Studies.
  3. Graham, John R. & Harvey, Campbell R., 2001. "The theory and practice of corporate finance: evidence from the field," Journal of Financial Economics, Elsevier, vol. 60(2-3), pages 187-243, May.
  4. Massimo Bordignon & Silvia Giannini & Paolo Panteghini, 2001. "Reforming Business Taxation: Lessons from Italy?," International Tax and Public Finance, Springer, vol. 8(2), pages 191-210, March.
  5. Paolo M. Panteghini, 2004. "Neutrality Properties of Firm Taxation under Default Risk," Economics Bulletin, AccessEcon, vol. 8(4), pages 1-7.
  6. McDonald, Robert L & Siegel, Daniel R, 1985. "Investment and the Valuation of Firms When There Is an Option to Shut Down," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 26(2), pages 331-49, June.
  7. Boadway, Robin & Bruce, Neil, 1984. "A general proposition on the design of a neutral business tax," Journal of Public Economics, Elsevier, vol. 24(2), pages 231-239, July.
  8. Peter Sørensen, 2005. "Neutral Taxation of Shareholder Income," International Tax and Public Finance, Springer, vol. 12(6), pages 777-801, November.
  9. Michael P. Devereux, 2009. "Taxing Risky Investment," Working Papers 0919, Oxford University Centre for Business Taxation.
  10. Peter Birch Sørensen, 2003. "Neutral Taxation of Shareholder Income: A Norwegian Tax Reform Proposal," CESifo Working Paper Series 1036, CESifo Group Munich.
  11. Brennan, Michael J & Schwartz, Edwardo S, 1978. "Corporate Income Taxes, Valuation, and the Problem of Optimal Capital Structure," The Journal of Business, University of Chicago Press, vol. 51(1), pages 103-14, January.
  12. Paolo M. Panteghini, 2001. "Corporate Tax Asymmetries under Investment Irreversibility," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 58(3), pages 207-, July.
  13. Paolo Panteghini, 2002. "Asymmetric Taxation under Incremental and Sequential Investment," CESifo Working Paper Series 717, CESifo Group Munich.
  14. Steve Bond & Michael Devereux, 1993. "On the design of a neutral business tax under uncertainty," IFS Working Papers W93/01, Institute for Fiscal Studies.
  15. repec:ebl:ecbull:v:8:y:2004:i:4:p:1-7 is not listed on IDEAS
  16. Michael Devereux & Harold Freeman, 1991. "A general neutral profits tax," Fiscal Studies, Institute for Fiscal Studies, vol. 12(3), pages 1-15, August.
  17. Michael Keen & John King, 2002. "The Croatian profit tax: an ACE in practice," Fiscal Studies, Institute for Fiscal Studies, vol. 23(3), pages 401-418, September.
  18. Fehr, H. & Wiegard, W., 1998. "The Incidence of an Extended ACE Corporation Tax," Papers 16/98, Norwegian School of Economics and Business Administration-.
  19. Ernst Fehr & Wolfgang Wiegard, 2001. "The Incidence of an Extended Ace Corporation Tax," CESifo Working Paper Series 484, CESifo Group Munich.
  20. Paolo M. Panteghini, 2004. "Wide versus Narrow Tax Bases under Optimal Investment Timing," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 60(4), pages 482-, December.
  21. Johannes Becker & Clemens Fuest, 2005. "Does Germany Collect Revenue from Taxing Capital Income?," CESifo Working Paper Series 1489, CESifo Group Munich.
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Citations

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Cited by:
  1. Paolo M. Panteghini, 2008. "Corporate Debt, Hybrid Securities and the Effective Tax Rate," Working Papers 0804, University of Brescia, Department of Economics.
  2. Paolo Panteghini, 2009. "The capital structure of multinational companies under tax competition," International Tax and Public Finance, Springer, vol. 16(1), pages 59-81, February.
  3. Panteghini, Paolo M., 2007. "Interest deductibility under default risk and the unfavorable tax treatment of investment costs: A simple explanation," Economics Letters, Elsevier, vol. 96(1), pages 1-7, July.
  4. Vesa Kanniainen & Paolo Panteghini, 2008. "Tax Neutrality: Illusion or Reality? The Case of Entrepreneurship," CESifo Working Paper Series 2306, CESifo Group Munich.
  5. Raffaele Miniaci & Paolo Panteghini & Maria Laura Parisi, 2011. "Debt shifting in Europe," Working Papers 1121, Oxford University Centre for Business Taxation.
  6. Paolo Panteghini, 2006. "A Simple Explanation for the Unfavorable Tax Treatment of Investment Costs," CESifo Working Paper Series 1784, CESifo Group Munich.
  7. Francesca Barion & Raffaele Miniaci & Paolo Panteghini & Maria Laura Parisi, 2010. "Profit Shifting by Debt Financing in Europe," CESifo Working Paper Series 2985, CESifo Group Munich.

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