Estimating the Tax Advantage of Corporate Debt

Authors

  • JOSEPH J. CORDES,

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    • 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.
  • STEVEN M. SHEFFRIN

    1. Department of Economics, The George Washington University, Department of Economics, University of California, Davis
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    • 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.

ABSTRACT

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.

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