This paper reviews the theoretical and empirical structure on taxation and capital structure and applies it to the Tanzanian environment. Substantial evidence exists that the taxation policy of a country and the effective tax level prevailing in an economy can have an impact on the amount of debt in a firm’s long term financing structure. Much of the development of this conventional wisdom draws from studies of developed economies such as the United States of America and United Kingdom and may not readily extend to a developing country like Tanzania. This study sets to examine extant academic and practitioner research in this area and extract implications for Tanzanian firms. Our analysis allows us to argue that there will be an optimal capital structure for Tanzanian companies at which firm's value is maximized. Moreover, over a cross section of firms the level of debt will rationally vary as a function of firm and industry characteristics. JEL Classification: G 13, 032
Taxation; capital structure; debt equity