Bush Tax Cuts (Sept. 15)

Mike and Co. —

As you may have seen, a little bombshell tucked away in the Bush tax plan released September8 — initially overshadowed by the provision ending the special treatment of carried interest — went without comment for almost a week: the proposed end of the business interest deduction…  It is a much bigger deal by any measure.

Best,

Dana

———-

Though not fully detailed in “Backgrounder: Jeb Bush’s Tax Reform Plan: The Reform and Growth Act of 2017, the plan includes a proposal that would “remove the deduction for borrowing costs [which] encourages business models dependent on heavy debt.”

(https://jeb2016.com/reformandgrowth/?lang=en)

It is not a modest proposal.  It is a deep dive into a long and mostly academic discussion that ultimately seeks to determine the optimal or most equitable relative value of stocks and bonds, expressed in tax policy.

Per the Times, which noticed it and wrote today: “Mr. Bush is seeking to destroy an incentive for American companies to borrow money… His policy could have a profound impact on almost every industry, but would especially affect the private equity and real estate industries.”

And not in a good way, presumably, except for banks, which are exempt, and for startups and small businesses, which have higher financing costs because they can’t borrow the way mature companies can.  How much is at stake?  Companies sold on average $1.4 trillion in debt a year for the last three years.  By comparison, firms issued only $311 billion in equity in 2014, $204 billion so far in 2015.

Where is the reaction from industry?  Maybe the silence reflects shock or disbelief.   Maybe, as the Times speculates, the tax plan as a whole reduces both individual and corporate rates so much that it’s unclear how disadvantaged the wealthy would be.

The deduction is practically bedrock policy in most advanced market economies, although the IMF once inveighed against companies’ bias toward debt: it “creates significant inequities, complexities, and economic distortions,”  But the IMF has also acknowledged that abolishing interest deductibility would be difficult to carry out and as a result no country has ever eliminated it.

Bush may be right that the tax code should be more neutral as between debt and equity investment.  It can lead to excessive borrowing and leave companies no choice but to declare bankruptcy when they can’t repay creditors in lean times and high borrowing rates, especially short-term rates, were central to the 2008 financial crisis and the prolonged recovery.

Still, Bush’s idea is so disruptive of the way companies finance themselves that it could destroy value and, along the way, create its own new and unpredictable economic distortions.  It would almost necessarily result in less, not more, corporate investment — the opposite of what Bush may thinks he’s achieving.

It is not entirely clear why Bush would want to wander into this thicket.  It’s a Trumpian scale proposal shrouded in recondite theoretical debate.  It’s even less clear what the proposal’s many effects would be.  It may cause more problems than it solves and its huge unknowns includes the impact on the budget, on executive compensation inflated by corporate borrowing for stock repurchases, and on private equity, which the deductibility of interest subsidizes.

3 thoughts on “Bush Tax Cuts (Sept. 15)”

  1. I happen to be writing to make you understand what a useful experience our daughter had studying your web site. She mastered several pieces, which include what it’s like to possess an awesome helping nature to let other individuals with ease know precisely some problematic subject matter. You truly exceeded people’s expectations. Thank you for producing these practical, trusted, informative and in addition fun tips about this topic to Kate.

  2. I truly wanted to write a small word to be able to thank you for those unique tips and tricks you are writing on this website. My time consuming internet search has now been rewarded with useful suggestions to write about with my relatives. I would suppose that we website visitors are very lucky to live in a very good website with very many wonderful professionals with very beneficial tips. I feel very much privileged to have used your entire website page and look forward to tons of more pleasurable times reading here. Thanks a lot once more for everything. https://bronchitismed.com medication for chronic bronchitis

Leave a Comment

Your email address will not be published. Required fields are marked *