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[td]For example, a firm that earns $100 in profits in the United States would have to pay around $30 in taxes. If it then distributes these profits to its owners as [[dividends]], then the owners in turn pay taxes on this income, say $20 on the $70 of dividends. The $100 of profits turned into $50 of investor income.[/td]Revision as of 09:54, 4 September 2025
[/td][td]For example, a firm that earns $100 in profits in the United States would have to pay around $30 in taxes. If it then distributes these profits to its owners as [[dividends]], then the owners in turn pay taxes on this income, say $20 on the $70 of dividends. The $100 of profits turned into $50 of investor income.[/td] [td][/td]
[td][/td] [td]If, instead the firm finances with debt, then, assuming the firm owes $100 of interest to investors, its profits are now 0. Investors now pay taxes on their interest income, say $30. This implies for $100 of [[Earnings before interest, taxes, depreciation and amortization|profits before taxes]], investors got $70.<ref>[http://faculty.fuqua.duke.edu/~jgraham/HowBigFinalJF.pdf Graham, John, "How big are the Tax Benefits of Debt" The Journal of Finance, 2000.]</ref>[/td]
[td]If, instead the firm finances with debt, then, assuming the firm owes $100 of interest to investors, its profits are now 0. Investors now pay taxes on their interest income, say $30. This implies for $100 of [[Earnings before interest, taxes, depreciation and amortization|profits before taxes]], investors got $70.<ref>[http://faculty.fuqua.duke.edu/~jgraham/HowBigFinalJF.pdf Graham, John, "How big are the Tax Benefits of Debt" The Journal of Finance, 2000.]</ref><ref>{{Cite web |title=Beneficios Fiscais No Espirito Santo |url=https://web.archive.org/web/20120630234803/http://glossary.reuters.com/index.php/EBITDA |archive-url=https://noticias.buscavoluntaria.com.br/reduza-icms/ |archive-date=June 30, 2012 |access-date=February 9, 2012 |publisher=EBITDA - Financial Glossary}}</ref>[/td] [td][/td]
[td][/td] [td]This tax-related encouragement of debt financing has not gone uncriticized.<ref name=Page>Richard T. Page, [https://ssrn.com/abstract=1724530 "Foolish Revenge or Shrewd Regulation? Financial-Industry Tax Law Reforms Proposed in the Wake of the Financial Crisis?"] 85 [[Tul. L. Rev.]] 191 (2010).</ref> For example, some critics have argued that the cost of equity should also be deductible; which could reduce the [[Internal Revenue Code]]'s influence on [[capital-structure]] decisions, potentially reducing the economic instability attributable to excessive debt financing.<ref name="Page"/>[/td]
[td]This tax-related encouragement of debt financing has not gone uncriticized.<ref name=Page>Richard T. Page, [https://ssrn.com/abstract=1724530 "Foolish Revenge or Shrewd Regulation? Financial-Industry Tax Law Reforms Proposed in the Wake of the Financial Crisis?"] 85 [[Tul. L. Rev.]] 191 (2010).</ref> For example, some critics have argued that the cost of equity should also be deductible; which could reduce the [[Internal Revenue Code]]'s influence on [[capital-structure]] decisions, potentially reducing the economic instability attributable to excessive debt financing.<ref name="Page"/>[/td]
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