Tag Archives: debt finance

Should tax systems favor equity finance?

 The UK tax system – as many others – currently favors debt financing because interest payments are tax deductible. As a result, even companies that sit on piles of cash will have incentives to keep piling debt.

A recent Financial Times column made the case for shifting the bias towards equity finance. While this shift may encourage short term investment, create employment, improve productivity and so on, I found the notion bothering.

Instead of favoring either choice, why not simply remove the tax break? Is there a reason to favor either debt or equity financing, and in doing so to forgo revenues that could be put to better use?

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