Corporate Debt and Taxes

Abstract

We provide updates to and perspectives on the enduring topic of debt and taxes. The recent decade brought us new empirical strategies, accounting rules, and tax laws. We discuss how these and other developments change our understanding of leverage and taxes. Overall, tax incentives still do not seem to have a consistent, first-order effect on corporate capital structure. This presents a puzzle as governments increasingly limit interest deductibility, citing its contribution to overleverage and distress. We discuss critical empirical challenges such as measurement, highlight issues surrounding assumptions about tax rates and real-world financing decisions, and offer insights and direction for future research. We conclude that rather than asking if taxes are a first-order driver of corporate capital structure, a more productive goal is a greater understanding of when tax incentives yield material effects on corporate capital structure. Expected final online publication date for the Annual Review of Financial Economics, Volume 13 is November 2022. Please see http://www.annualreviews.org/page/journal/pubdates for revised estimates.