The Effects of Tax Reforms to Address the Debt-Equity Bias on the Cost of Capital and on Effective Tax Rates (29 March 2016)

european commission

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, dis- advantages for firms with restricted access to external funds and profit shifting incentives.