The Effects of Tax Reforms to Address the Debt-Equity Bias on the Cost of Capital and on Effective Tax Rates

Corporate income tax systems usually discriminate between the different sources of finance: They favour debt over equity financing since interest costs are deductible for tax purposes whereas there is no equivalent relief for equity-financed investments. This unequal treatment might cause economic problems such as excessive leverage in the corporate sector and an associated increased vulnerability to economic crises, disadvantages for firms with restricted access to external funds and profit shifting incentives.