Wednesday, October 26, 2011

"Financial Crisis Was Rooted In The Corporate Income Tax Interest Deduction"

Good title. I borrowed it from CapitalGainsandGames. Pete Davis. Here's what Davis wrote:

The corporate income tax deduction for interest produced a -6.4% tax rate on debt financed investments, while the double taxation of equity income (dividends and capital gains) produced a 36.1% tax on equity financed investments according to this 2005 Congressional Budget Office study.

Borrow and spend to grow your business, and you make money by paying your taxes. Use equity to grow your business, and taxes cost you more than 36%. Something like that. I can be sloppy as hell with the numbers and you can still see the difference.

Oh. There was something else.

From the Yale Law Journal, July 1974. JSTOR makes the first page available here. A paper by Alvin C. Warren, Jr.

Alvin Warren writes:

While interest expense is currently deductible in full from corporate income, no deduction whatsoever is permitted for dividend payments. The unlimited deduction for corporate interest payments originated in 1918 as a temporary measure designed to equalize the effects of the World War I excess profits tax. Before 1918, only limited offsets against corporate income were granted for interest payments...

Just to point it out, the deduction for corporate interest payments is not something that was created by the Federal Reserve. It was an act of Congress, skewing the playing field.

Ironic, isn't it? that Congress did the study pointing out the problem that Congress created. The more so, since Congress never bothered to fix the problem. I guess they are too busy pointing the finger at the Fed.

// Googling corporate interest deduction brought up these links.

1 comment:

The Arthurian said...

The original link to the article by Pete Davis is now defunct.

An article of the same name, by the same author, carrying the same excerpt, is now available at Wall Street Pit.