Corporate Debt, Hybrid Securities, and the Effective Tax Rate

Effective tax rates (ETRs) are useful tools to make comparisons between different tax systems. However, the existing ETR measures are based on rather simplifying assumptions. In particular, they disregard the existence of different kinds of debt and hybrid securities. In this paper, we use contingen...

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Bibliographic Details
Published in:Journal of public economic theory 2012-02, Vol.14 (1), p.161-186
Main Author: PANTEGHINI, PAOLO M.
Format: Article
Language:English
Subjects:
Bonds
Corporate debt
Economic theory
Studies
Tax rates
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Summary:Effective tax rates (ETRs) are useful tools to make comparisons between different tax systems. However, the existing ETR measures are based on rather simplifying assumptions. In particular, they disregard the existence of different kinds of debt and hybrid securities. In this paper, we use contingent‐claim analysis to calculate the ETR. We will therefore deal with both pure debt and two of the most well‐known hybrid securities, that is, convertible and reverse convertible bonds. We will show that effective taxation crucially depends on the characteristics of debt and that the existing measures of ETR can be dramatically biased, since they account neither for default risk nor for the ability to convert debt into equity.
ISSN:1097-3923
1467-9779
DOI:10.1111/j.1467-9779.2011.01537.x