Law Commons^™

The Debt-Equity Distinction In A Second-Best World, Katherine Pratt

Vanderbilt Law Review

This Article discusses the time-honored but outdated tax law distinction between corporate debt and equity. Economic and legal commentators and the Treasury Department have made various proposals to eliminate the debt-equity distinction. The theory of the second best posits that eliminating an economic distortion does not necessarily increase efficiency if other economic distortions remain.' Policymakers cannot simply assume that eliminating the distortionary debt-equity distinction will automatically increase efficiency because other distortions in the income tax will remain. This Article evaluates a number of the proposals to eliminate the debt-equity distinction, taking into account numerous distortions that are likely to remain …