Saturday, 11 June 2011

Tax debt shield

Why do companies use debt as a form of financing? Partly because it's tax-efficient: interest is tax deductable. The tax rules encourage companies to use debt. But debt is bad for companies as it can be called in forcing the company into liquidation. By making interest not tax deductable we can make companies, and hence our economy, more stable, as they will be incentivised to use less debt. This will also reduce the value of cash, encouraging more individuals to invest in shares.

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