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Welfare effects of business taxation under default risk

Author

Listed:
  • Nicola Comincioli

    (University of Brescia
    Fondazione Eni Enrico Mattei)

  • Paolo M. Panteghini

    (University of Brescia
    CESifo)

  • Sergio Vergalli

    (Fondazione Eni Enrico Mattei
    University of Brescia)

Abstract

In this article, we use a stochastic model with a representative firm to study business tax policy under default risk. We will show that, for a given tax rate, tax revenue and welfare are crucially affected by default risk and its costs, as long as interest expenses are deductible. Thus, an evaluation made without accounting for default may be dramatically biased. Moreover, we show that the “debt bias” due to the tax treatment of debt finance causes a quite relevant deadweight loss.

Suggested Citation

  • Nicola Comincioli & Paolo M. Panteghini & Sergio Vergalli, 2021. "Welfare effects of business taxation under default risk," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 28(6), pages 1412-1429, December.
    • Handle: RePEc:kap:itaxpf:v:28:y:2021:i:6:d:10.1007_s10797-020-09650-1
    DOI: 10.1007/s10797-020-09650-1
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    Cited by:

    1. Nicola Comincioli & Paolo Panteghini & Sergio Vergalli, 2021. "A Welfare Analysis on Start-Up Decisions under Default Risk," CESifo Working Paper Series 9478, CESifo.

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    More about this item

    Keywords

    Capital structure; Default risk; Business taxation and welfare;
    All these keywords.

    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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