Wednesday, October 26, 2011

And one from page five.

From the fifth page of Google results (see my two previous posts):

How the tax code encourages debt : The New Yorker

The article is The Debt Economy by James Surowiecki. It starts with a quote from John Kenneth Galbraith, one I think I recognize from A Short History of Financial Euphoria. So I felt like I had an "in" with the author, and I liked the article before I got past the first sentence. Oh, well.

Here's just a small piece of Surowiecki's article:

Debt didn’t get dangerously out of scale because the system was broken. It got out of scale, in part, because the system worked.

The government doesn’t make people go into debt, of course. It just nudges them in that direction. Individuals are able to write off all their mortgage interest, up to a million dollars, and companies can write off all the interest on their debt, but not things like dividend payments. This gives the system what economists call a “debt bias.”


But this excerpt seems to hint that maybe corporations should be able to write off both their dividend payments and their interest payments. No. Leave dividend payments as they are; that's not the problem.

And make corporate interest payments taxable. That will reduce the accumulation of private sector debt. And that is what must be done in order to restore growth.


Jazzbumpa said...

You have an apple and a kumquat here.

Interest paid is an expense. Profits are earnings minus expenses. Interest paid reduces profitability, just like paying the light bill.

Dividends come out of the corporation's retained earnings - the accumulation of AFTER-TAX profits. (As an aside: Hence the argument that taxing dividends is double taxation, and the decision to give them a special reduced rate.)

Irrespective of real or implied incentives, this is merely simple accounting.

BUT - since corporations are now PEOPLE, they should be taxed like people - on earnings, not on profits. Yeah, I can deduct my mortgage interest - this was social engineering decision in the past to encourage home ownership vis-a-vis renting. But I can't deduct interest on other operating expenses (buying a car or TV,) nor capital improvements (a new roof or remodeled kitchen) - though it seems that at some time in the past, I used to be able to.

Note that I am making no argument for or against anything. merely stating the facts as I see them.


The Arthurian said...

"You have an apple and a kumquat here."

I think the difference arises because of tax law. If a corporation gets to lump dividend payments in with its other expenses for tax purposes, then the dividend payments will be (for all practical purposes) simply another expense. Today, only the tax law prevents this.

"BUT - since corporations are now PEOPLE, they should be taxed like people - on earnings, not on profits."

NICE!!! I'm adopting that one.

Somewhat related: I always wondered, since corporations are people and slavery is illegal, why corporations are allowed to own other corporations.

Your reticence is out of character.