Studies of Small Business Finance: Tax Policy and Small Business Financing

摘要

The report discusses the effects of taxation on investment risk-taking and on sources of small business financing. For providing risk-taking incentives, the author states that a progressive tax is less favorable to risk-taking than a proportional tax. Also, the inclusion of some form of loss offset is favorable to risk-taking. Small businesses, however, may not be able to take advantage of an offset provision because they may not have the current, past, or future income to fully utilize the offset. Therefore, a loss is relatively more significant to a small business, raising the risk of investing in it. Taxation also affects sources of financing. Because interest on debt is tax deductible and dividends are not, firms are encouraged to finance with debt.