Question

How does the corporate income tax influence the financing decisions of corporations? What impact does this have? Who benefits under this situation?

Answer 1

Corporate income tax has its own influence while a determination of various financial decision of the organisation because corporate tax rate are always disadvantage for the equity capital as it would be leading to an overall lower profits for the company but it will always be beneficial from the debt holders perfect because interest which are payable to debt holders are always tax deductible in nature so it will be having an added advantage for the organisation because of lower cost of debt.

Corporate tax will mean that the company will be having a higher amount of debt capital because if the corporate tax rate are higher, it will be having more advantage to have a higher proportion of debt capital in the overall capital structure for higher interest tax shield.

The company will be benefiting when tax rate are high because it will claim more interest tax shield when higher tax rate will be there. The government will also be able to collect more of the tax.