The Tax Shield Increases the Interest Rate

Marcel Fischer*, Bjarne Astrup Jensen

*Corresponding author for this work

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Abstract

We study the general equilibrium implications of the corporate tax shield in a growth economy that taxes household income and firm profits and redistributes tax revenues. Our stylized model predicts that in general equilibrium the tax shield's reduction of the corporate after-tax borrowing rate is counteracted (but not fully eliminated) by an increase in the pre-tax rate.
Original languageEnglish
Article number107096
JournalJournal of Banking & Finance
Volume161
Number of pages9
ISSN0378-4266
DOIs
Publication statusPublished - Apr 2024

Keywords

  • Tax shield
  • Interest rate
  • General equilibrium

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