Kari, Seppo Khoza, Londiwe Manjezi, Nangamso McNabb, Kyle
Year of Publication:
WIDER Working Paper No. 2019/10
The problem of debt bias can be tackled through either disincentivizing the use of debt financing or incentivizing the use of equity financing. Considering the South African context - in which many firms are highly leveraged and the marginal effective tax rates for using debt financing are significantly lower than those for equity financing - this study explores the case for introducing an allowance for corporate equity. We show that while such a reform would significantly neutralize the incentives to invest across debt and equity financing, our static simulations - using the NT-SARS CIT-IRP5 panel - show that it would entail a significant revenue loss to the fiscus.
debt bias investment incentives corporate tax tax revenue South Africa