External Publications
2021 .02

Welfare effects of business taxation under default risk


Authors : Nicola Comincioli, Paolo M. Panteghini, Sergio Vergalli
Type : Journal
Keywords : Welfare, Taxation, Risk
Published in : International Tax and Public Finance, 7 January 2021

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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