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Taxes and the Efficiency Costs of Capital Distortions

  • Alfons Weichenrieder
  • Tina Klautke

Tax neutrality towards alternative financing instruments for corporate investment is a ubiquitous demand in the political debate. At the same time, the literature is surprisingly silent about the magnitude of possible efficiency costs of a departure from tax neutrality. Againstthis background, the present paper discusses the theory of capital structure and provides backof-the-envelope calculations of the possible efficiency cost of a tax distortion of the debtequitydecision.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2431.

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Date of creation: 2008
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Handle: RePEc:ces:ceswps:_2431
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  19. Mihir A. Desai & C. Fritz Foley & James R. Hines, 2004. "A Multinational Perspective on Capital Structure Choice and Internal Capital Markets," Journal of Finance, American Finance Association, vol. 59(6), pages 2451-2487, December.
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  25. John R. Graham, 2003. "Taxes and Corporate Finance: A Review," Review of Financial Studies, Society for Financial Studies, vol. 16(4), pages 1075-1129.
  26. Scott, James H, Jr, 1977. "Bankruptcy, Secured Debt, and Optimal Capital Structure," Journal of Finance, American Finance Association, vol. 32(1), pages 1-19, March.
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  29. Stewart C. Myers & Nicholas S. Majluf, 1984. "Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have," NBER Working Papers 1396, National Bureau of Economic Research, Inc.
  30. Mervyn A. King & Don Fullerton, 1984. "The Taxation of Income from Capital: A Comparative Study of the United States, the United Kingdom, Sweden, and Germany," NBER Books, National Bureau of Economic Research, Inc, number king84-1.
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