External Publications
2021.02
Date: 7/1/2021

Welfare effects of business taxation under default risk


Authors:
Nicola Comincioli (Department of Economics and Management - University of Brescia, Fondazione Eni Enrico Mattei); Paolo M. Panteghini (Department of Economics and Management - University of Brescia, Fondazione Eni Enrico Mattei); Sergio Vergalli (Fondazione Eni Enrico Mattei, Department of Economics and Management - University of Brescia)
Type: Journal
Published in: International Tax and Public Finance, 7 January 2021
Keywords: Welfare, Taxation, Risk

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.

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Welfare effects of business taxation under default risk

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