Department of Economics, The George Washington University, and Department of Economics, University of California, Davis. An earlier version of this paper was written while both authors were Brookings Economic Policy Fellows at the Office of Tax Analysis, Department of Treasury. The views expressed herein are the authors' own and do not necessarily reflect those of the Office of Tax Analysis. We would like to thank David Bradford, Ron Masulis, Howard Nester, Jim Nunns, and Robert Hamada for helpful comments.
Estimating the Tax Advantage of Corporate Debt
Article first published online: 30 APR 2012
1983 The American Finance Association
The Journal of Finance
Volume 38, Issue 1, pages 95–105, March 1983
How to Cite
CORDES, J. J. and SHEFFRIN, S. M. (1983), Estimating the Tax Advantage of Corporate Debt. The Journal of Finance, 38: 95–105. doi: 10.1111/j.1540-6261.1983.tb03628.x
- Issue published online: 30 APR 2012
- Article first published online: 30 APR 2012
This paper presents estimates of the effective tax value of incremental interest deductions for corporations taking into account that they may not be able to utilize all their interest deductions fully because of either insufficient taxable income or the availability of nondebt tax shields. After describing particular features of the tax code which may drive a wedge between statutory and effective tax rates for debt finance, we present estimates using the Treasury Corporate Tax Model of effective tax rates for a variety of industry groupings. Our estimates suggest that the after-tax cost of debt varies widely across industries.