Feb 22, 2012 at 3:31 pm
No wonder we tend to get a tad overleveraged in this country.
The figure below, from data in the new White House/Treasury corporate tax framework, shows the effective tax rates on new investments as a function of whether the investment is financed through debt (borrowing) or equity (issuing stock).
Source: White House, Treasury Dept.
This looks awfully like one of them there distortions in the code we’d want to go after in the context of tax reform. As per the report, the WH and Treas are thinking along these lines:
Reducing the bias toward debt financing. A lower corporate tax rate by itself would automatically reduce but not eliminate the bias toward debt financing. Additional steps like reducing the deductibility of interest for corporations should be considered as part of a reform plan. This is because a tax system that is more neutral towards debt and equity will reduce incentives to overleverage and produce more stable business finances, especially in times of economic stress. In addition, reducing the deductibility of interest for corporations could finance lower tax rates and do more to encourage investment in the United States than keeping rates higher or paying for the rate reductions in other ways.
It’s a good idea, and as I continue to stress, a test of how sincere the lower-the-rates-broaden-the-base crowd are re the second part of that mantra.
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