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dc.contributor.authorSIMON, Jenny
dc.date.accessioned2012-07-18T09:53:04Z
dc.date.available2012-07-18T09:53:04Z
dc.date.issued2012
dc.identifier.issn1830-7728
dc.identifier.urihttp://hdl.handle.net/1814/22795
dc.description.abstractI present a rationale for a government to discriminate between debt and equity financing when taxing corporate income. For risk-averse entrepreneurs, equity generates more surplus than debt, because it provides financing and insurance. A government seeking to extract surplus from entrepreneurs would naturally tax equity-generated income more than debt-generated income. I also establish a less obvious reason why the government might want to extract surplus from entrepreneurs. It is well understood that when the quality of projects is unobservable to investors, risk-averse entrepreneurs with higherreturn projects might retain a larger share of equity to signal their type (Leland and Pyle (1977)). I show that in such an adverse selection setting, while competitive investors are constrained to offer actuarially fair terms, the government can use taxes to discriminate between types. This degree of freedom allows manipulation of the relevant incentive constraints so that a lower level of debt suffices for separation, and an increase in overall efficiency can be obtained. Since entrepreneurs separate along their debt-to-equity ratios, the optimal non-linear tax schedule to achieve the desired discrimination is isomorphic to one that taxes debt-generated income at a lower rate than equitygenerated income.en
dc.format.mimetypeapplication/pdf
dc.language.isoenen
dc.relation.ispartofseriesEUI MWPen
dc.relation.ispartofseries2012/13en
dc.rightsinfo:eu-repo/semantics/openAccess
dc.subjectCorporate Taxationen
dc.subjectDebt Biasen
dc.subjectInvestment Decision under Asymmetric Informationen
dc.subjectG18en
dc.subjectG11en
dc.subjectH25en
dc.subjectD82en
dc.titleOptimal Debt Bias in Corporate Income Taxationen
dc.typeWorking Paperen
dc.neeo.contributorSIMON|Jenny|aut|
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