One way Republicans are looking to rewrite the U.S. tax code is by taking aim at one of the foundations of modern finance—the deduction that companies get for interest they pay on debt.
Companies of all sizes have feasted on debt because it’s cheaper than equity financing and widely available. In 2015, U.S. businesses paid in all $1.3 trillion in gross interest, according to Commerce Department data, which is equal in magnitude to the total economic output of Australia.
The plan would raise money to help offset Republicans’ corporate tax cuts and reduce a “huge bias” toward debt financing. The plan is projected to generate about $1.5 trillion in revenue for the government over a decade.
And in a world with no interest deduction, debt-fueled leveraged buyouts by private-equity titans could become more expensive to finance and junk bonds less appealing. “That’s not necessarily bad for society,” said David Beim, a retired Columbia University finance professor. “We have too much systemic financial risk in our economy.”
What do you guys think of this?
Not happening, it'll go the same as that rumored repeal of the tax break companies get for providing health insurance to employees that was supposed to be part of the healthcare bill, it'll disappear. We like to think this country espouses free market capitalism when what it really does is espouse corporatist capitalism. We've somehow tricked ourselves into believing these two things are one and the same. What a joke.
I agree it's not happening. However, right now all kinds of radical ideas in tax policy are being floated. The only two that are officially off the table (for individual income) are charitable deductions and the home mortgage interest deduction. But for business income taxation, the pols want to reduce it overall, not so much close "loopholes." The lower the nominal rate, the less consequential are the loopholes.
The structural advantages of debt vs. equity financing are much on the minds of the good government policy types, as the number of IPOs continues to languish. Of course, it's equity financing that brings companies into the public marketplace. The incoming head of the SEC said his top priority is removing structural barriers to IPOs. That was also the theme of the last major piece of financial reform legislation, the JOBS Act. When surveyed, CEOs/CFOs of companies thinking of going public cite as the main concern, not forgoing the tax advantage of debt financing, but the excessive fixed cost of small companies IPO-ing, e.g., SarbOx compliance, class action lawyers, and Reg FD.
Somewhat paradoxically, opponents of the mortgage interest deduction find themselves fighting the headwinds of both the Democrats and Republicans. The National Association of Realtors, Chamber of Commerce, etc. are pretty intensely against removing the mortgage interest deduction--Republicans, by and large (not always), tend to listen to the so-called business lobby (as an aside, I say "so-called" since I, a Republican and entrepreneur, don't recall electing the Chamber of Commerce to speak for me on business matters). On the other side, blue states/high-income urban areas tend to be the biggest "beneficiary" (it's not a real benefit, net/net) of the mortgage interest deduction since the standard deduction for married couples tends to wipe out any marginal benefit of the mortgage interest deduction for vast segments of the population in lower cost of living areas.
It's a shame, too, since the mortgage interest deduction is one of the most wasteful tax deductions ever conceived as it serves no purpose--rather than making home ownership more affordable, it simply artificially inflates real estate prices (at certain price points). Instead of paying the tax you end up paying the same amount in the purchase price and/or via net interest.
I'm not disagreeing with you, I'm just pointing out the business owner reasoning is wrong. 1) Paying $0 in interest with no tax advantage is better than paying $1 in interest while saving $0.30 on taxes; 2) regardless of the so-called "tax benefit", the main benefit of debt is that it's not equity--equity can be incredibly expensive when you're talking about giving up a portion of your business. For a successful business, giving up equity can be worse than paying usurious interest.
Regardless of the party (Democrats or Republicans) making policy proposals on taxes or business, I'm more often than not left with the impression that the legislator(s) responsible for said proposed policies has/have virtually no real world finance, tax, or business experience.
Bigger risk is the DTA and DTL and NOLs shift in value if taxes decrease - unique opportunity to find a little extra value in the market.
Zero chance this happens. None.
This actually has a much higher chance of happening than some of their other ideas. People are analyzing this as if it is a stand alone idea. Businesses would be all for paying taxes on interest on debt if it meant they could lower their overall tax liabilities. There are only two groups who would complain and they are bankers and private equity groups. If we are going to be honest about it, no one really gives a fuck what we think.
I completely reject the proposal on its face. I abhor tax policy that materially diverges from general accounting principles as it opens up the flood gates for corporatists/crony capitalists to lobby for winning and losing industries. Interest is a legitimate business expense just like it's a legitimate commercial real estate expense. If you make interest non-deductible to businesses, you could set businesses up to owe taxes on negative income, or worse, on negative cash flow! You're setting companies up to fail. Also, what business is it of Congress to encourage or discourage the method in which private businesses raise capital? There is absolutely NOTHING wrong with debt when it's managed properly. Nothing.
Congress needs to throw out its absurd tax code altogether and return to generally accepted accounting principles, and then adjust the the tax rate to a reasonable rate (in my view, less than 20%).
The pro debt tax agenda that has plagued the West for the last century is a ruthless conspiracy propagated by the Rothschild's and their surrogates. They systematically ensured that their banking cartel would continue to flourish long into the future. Now Trump looks to drain the swamp and MAGA by bringing the globalists to task.
GREAT NEWS!
https://en.wikipedia.org/wiki/Poe%27s_law
I would imagine savvy sponsors/MNCs would find creative org structures to funnel earnings / raise debt in favorable jurisdictions that allow for the interest deduction. Just because the US changes their tax policies doesn't mean that other countries will. My bet is this will be an unintended consequence if the policy does manage to pass.
The plan stops the government from subsidizing investment, which will hit capital intensive industries like infrastructure hardest--ironic, given their election platform.
But that's the thing--it no more subsidizes investment as the "tax write-off" for hiring personnel subsidizes hiring, or the "tax write-off" for utilities subsidizes the electric bill. Interest expense is a legitimate expense recognized in generally accepted accounting principles. If a GAAP expense is no longer recognized as an expense on your taxes then there is just as much justification in eliminating any expense as a "tax deduction."
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