Question

Explain in detail how the corporate taxation affects capital structure choice? How about personal capital income taxation?

Answer 1

Capital structure of a company directly affects it's tax payments as capital structure comprises of both debt and equity.As Interest payments on debts are directly deductle from taxable profits which it is not feasible in case of equity financing.In case of equity company has to pay tax on dividend payments made by it whereas there is no tax on retained earnings made by companies.So it becomes very important for companies to determine capital structure after considering the corporate taxation rates.Personal capital income taxation depends upon the period of holding of corporate shares.Generally the rate of tax for short period is more in comparison to long term.Individiuals are required to pay capital gains tax in their own hands.However in case of income from debt investment only Interest income is taxable in the hands of the individuals.Individuals can set of their loss on capital investment with the gains made on the investments using tax loss harvesting strategy.