What impact do you think a flat tax has on the cost of capit

Solution

Due to the flat rate of taxes, the entire profit of the company is subject to a single rate of tax and the marginal rate of tax is equal to the flat rate. Since money raised for the investment is subject to a single rate of tax, the tax shields for debt raised would be flat and same for the entire amount of money. This would typically lead to a reduction in the cost of capital, as the entire amount of debt is subjected to the same tax rate for calculating the tax shields.

The flat tax rate is bound to have far reaching consequences wherein the tax calculation and compliance becomes simpler and also because of higher tax shields, the cost of capital would come down and this might result in higher investments and more projects becoming financially feasible.