IMF paper seeks to quantify debt bias
Tax systems create “pervasive” debt bias, authors find
Tax systems are encouraging the build-up of debt bias, and the problem looks set to worsen, according to a working paper published by the International Monetary Fund on November 10.
Oana Luca and Alexander Tieman model and estimate debt bias in both traditional banks and many players in the non-bank sector in their paper Financial sector debt bias. The bias is "pervasive", they find, accounting for as much as 10% of total leverage among banks and 20% for investment banks.
Banks are exiting the post-crisis deleveraging phase, and now exist in a world of ultra-low interest rates, which points to the likelihood of growing debt bias in the years ahead, the authors warn.
"Tax policies should aim to put debt and equity finance on an equal footing, thus rendering the tax system neutral with respect to corporate finance decisions," they argue.
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