The existence of personal taxes on interest income and equity income will always increase the advantage of debt to a firm.

Question

Quizplus · Accepted Answer

The existence of personal taxes on interest income and equity income can actually decrease the advantage of debt to a firm because personal taxes on interest income reduce the after-tax return to debt holders, making debt financing less attractive compared to equity financing, which might be taxed at a lower rate or have favorable tax conditions (e.g., lower capital gains taxes or tax-exempt dividends in some jurisdictions).

The Existence of Personal Taxes on Interest Income and Equity