U.S. companies have had a long love affair with debt, and Washington has tacitly approved. Although the tax benefits are not the only driver of corporate America’s preference for loans — cheap rates and corporate strategy, as in Macy’s case, are other major factors — the tax code often tips the scales toward using debt for deals or for expanding a business.
Over the past generation, debt in America has exploded, becoming a way of life in nearly every sphere of society. And the tax code has been its handmaiden. Home buyers, towns and corporations all enjoy tax breaks that grow as they borrow more. Indeed, federal officials have found that the deductions for business debt are so generous that the government is, in many cases, essentially paying companies to borrow.
The surge in borrowing has opened new markets and financial industries. It has also at times powered economic growth — for instance, the boom preceding the housing bust — and activities that wouldn’t have been possible under other conditions. Commercial developers build projects they otherwise wouldn’t. Private equity firms are able to buy out companies with huge sums of borrowed money. Big banks that lend out all this borrowed money have come to play an outsize role in the economy.
[…]
“The tax code is interfering dramatically with the choice of how you finance and how you deliver returns in the corporate sector,” said Douglas Holtz-Eakin, an economist who heads the American Action Forum. “Why would you build into the tax code a permanent bailout for corporate debt-financed investments?”
Brilliant demotivator.
“Neither a lender nor borrower be.”
Great summary R.KW!
Take a look at all the rumors floating around Obama Claus’s latest redistribute-the-wealth plan: the “August Surprise”.
From the Economist and Reuters: the plan would forgive millions of of Americans who owe more than what their homes are worth. One in five – are underwater with negative equity of some $800 billion.
After the plan leaked out and saner heads reviewed the plan, the White House quickly distanced itself and said it was never under consideration.
Yeah, right! from the same folks who promised: “not [to] increase taxes on anyone if they “make under $250,000; you will not see your taxes increase by a single dime –- not your income taxes, not your payroll tax, not your capital gains tax”
Can you imagine the reaction from the 4-in-5 homeowners who pay their mortgage on time?
jbenson2, that rumor was shot down over at Calculated Risk.
“Can you imagine the reaction from the 4-in-5 homeowners who pay their mortgage on time?”
That’s why it was never considered. That, and contract law.
Worst of all, the US is exporting, and has exported crap thinking to the rest of the world.
Every idiot on the planet seems to want to emulate the US on just about everything – crappy advertising led television, Armies where shouting in the face of troops by senior soldiers is ‘normal'(how the hell does that help you to kill the enemy?), paying executives in business astronomic incomes (oh, and the more modern version, whether the business is losing money or not), Political leaders pointing at people they’ve never met and smiling and waving like the totally fake goons they are, trophy wives all arse and chest but nothing of value above that area, totally shit talentless pop ‘singers’ earning vast sums, film actors well past their sell-by date given roles just because of their name (happens in Europe as well)utterly pointless females (Paris Hilton,to mention but one) seem as role models, and lastly, the ones who annoy me mostest, Internet and computer ‘experts’ who don’t answer the question as put, but instead answer the question that was not asked because that’s the one they know the answer to. The whole of Microsoft seems to be based on this last one. Not much in there to be proud of thinks me. Some export.
Lou Minatti said:
That’s why it was never considered. That, and contract law.
You are correct. Public opinion backed by the law can be very powerful influencers.
Too bad Congress didn’t use similar logic when they shoved Obamacare down our throats. I’m looking forward to the 2010 November elections plus the State driven lawsuits.
Just like home “ownership”: Businesses in debt don’t close, and workers with mortgages don’t quit or go on strike.
‘corse, this sort of reasoning fails when there’s no customers or jobs.
so do you want to get rid of the home mortgage deduction?
There are two areas related to corporate debt that I find especially hinky.
First, why are leveraged buyouts, LBOs, allowed at all? In a LBO outside actors hook up with the management team of a publicly held company and conspire to steal the company using it’s own money. Forget that the assets involved, the target, doesn’t yet belong, to the people borrowing against it. Never mind that management has a legal obligation to shareholders whom they are helping to disenfranchise.
This provides no value to anyone, because whether the raiders succeed or fail the company is going to end up with lots of debt. The common way of paying back that debt is to sack people and sell assets immediately.
Second, it is increasingly common for viable corporations to declare bankruptcy. When an individual does this they face much harsher terms and they are acting their own interest. When management of a public company does this they are, once again, acting against their fiduciary duty to shareholders.
I can’t see any reasons, besides campaign contributions, why either practice is allowed.
#8–raster==nice video there. Highlights how multifactored the issue really is.
Only an idiot or a shill will focus on ONE ISSUE when an issue is multi-faceted. If you have ever run a lemonade stand, you know there are time you should debt finance, go public finance, or self finance. Risk and rewards for each on its own and for combo’s thereof.
You’d almost think there were no problems at all with economies under the gold standard. But its objectively NOT TRUE.
Silly Hoomans.
“so do you want to get rid of the home mortgage deduction?”
Sounds great to me. It’s welfare for the rich.
#12–Lou Minatti==touche.
So much in the American “Free Market” Capitalistic/Corp Welfare System really is geared to transfer wealth from the poor, middle class, and rich TO THE SUPER RICH.
And then idiots like too many voters resist any change to this massive transfer based on the notion that their Freedom is based on this system.
Silly Hoomans.
As Chief Economist for the Council of Economic Advisers to President George W. Bush – he helped stage manage the U.S. economy into the worst recession since WW2.
Truly an economist for the whole Republican Party – not just Bush and then McCain.
the American way of LIFE is to be in perpetual debt, as you pass it down to your kids.
Lets see…
The Gov. spends money it dont have..
Backs corps that should go to Bankruptcy..
Protects and SAVES corps that ARE in bankruptcy..
NEVER raises Min wage, and when it DOES, insted of $9 per hour we get $7..AND STILL cant make ends meet.
CC corps are protected from loss..Banks also, Major corps have protection…AND they Actually LOVE to show a LOSS over profit, But they still pay wages that would CHOKE A HORSE with $1000 bills.
Then WHO keeps knocking on my door, when I dont pay my bills.
Oh, and btw, in case you didn’t know….organized religion/corporations do NOT pay two trillion dollars in taxes EVERY year!!
Just in case anybody is interested.
#9 says “so do you want to get rid of the home mortgage deduction?”
#12 says Sounds great to me. It’s welfare for the rich.
Only the rich people own homes?
As for the yt video raster posted, the self avowed marxist properly identifies financial institutions and instruments as allowing the capitalist to engorge themselves at the cost of labor, but how can he ignore the elephant in the room? The FED RES. He has such an affinity for labor, in spite of his uppity british / Northeastern Ivy League academic establishment tone. The Federal Reserve isn’t even mentioned. Debt for us IS profit for the Fed Res, and it deserves repeating here, the Fed Res is a privately held for profit corporation that has NO ACCOUNTABILITY to answer any inquiry by any elected governing body. The FED GOV just gave the FED RES MORE POWER!
The definition of capitalism has morphed just in the few short years I’ve been a tax paying schmuck. Having my sales taxes increased so that Arlington’s elected government can help with Jerry Jones’ financing of his new Dallas Cowboy’s coliseum! Is the phrase command economy something that comes to mind? Modern day gladiators earning as much in one year as some small nations-states? Globalist central planners hate that term nation-state.
One more short point, Karl Marx was from a well to do family who I doubt worked a hard days labor in his life, yet he supposedly had some empathy for working class stiffs like me? More like he was an opportunistic douche bag that knew that constant wars and revolutions were central for the would be globalist masters of the universe to reign supreme. Karl Marx would approve of the FED RES.
WOOD
Corporations shouldn’t pay taxes, people should.
There should be no deductions for anyone. You make what you make and pay your share (progressive tax rate of course).
All income, whether from work or savings or speculation or “the dole” or from gambling should be taxed like income (progressively of course).
End of story.
Obviously the tax rate should be as low as possible.
Taxes are like a foot brake on a car, the harder taxes are pushed the more the economy slows down.
Father,
thats 1/2 lie.
TAXING the life out of the workers, HURTS the economy, as they cant Purchase or pay bills.
Forcing CORPS to pay TAXES from profits, makes the corps TRY to GIVE you a good product. It makes the THINK HARDER. It makes them NOT TO WANT tons of profit, so product prices tend to be LOWER, more FAIR.
If they RAISED prices to Transfer TAX to the consumer, the consumer would go someplace ELSE, or BULK at buying un-needed goods. they would have to SHOW negative Values to NOT be taxed. WHICH they dont want, as then they would be going into bankruptcy.
19,
THAT works, IF’
NO DEDUCTIONS, would/could be proven to WORK.
Corps would just change to Benefits, INSTED of money. Like the person for DELTA, after 6 years got 20 years of PAID retirement, with a Clause against Bankruptcy.
I still would rather take MONEY off the table completely.. MAX income, not MIN income. every job paid the same, unless its dangerous or NO ONE will do the job.
Government sponsorsed idiocy. First national party to stump on reversing this trend gets my vote. Guess I won’t be voting for awhile, eh?
#20 Why shouldn’t corporations pay taxes? They are legal persons after all.
I read an interesting idea a few days ago, that corporations should be taxed at a rate inverse to the amount of value their average employee adds to the economy.
The average McDonalds burger flipper makes little so you tax McDonalds more. A successful small software company pays it’s people more and they spend more into the economy, so that company would get a lower rate. Essentially you make a tax benefit for corporations that would otherwise hurt the economy most by outsourcing workers.
Workers that make the least are often in positions that are hardest to outsource, and tend consume more public resources than they contribute.
Example, why does Walmart love to hire older workers? Because the are on Medicare so Walmart doesn’t have to pay health benefits.
chris,
Interesting points.
I think corporations / businesses shouldn’t pay taxes because:
1. Some do pay taxes and some don’t, the playing field isn’t always level due to variability in the ethical standards at the top of these institutions. The honest ones finish last and go out of business.
2. Taxes paid by corporations / businesses are passes directly to the consumer through higher prices, effectively a REGRESSIVE tax on all of us.
The BIG trick with Taxing corps…
1. OUR money has to BUY something from them..They EARN MORE, they PAY MORE..
2. they will VALUE employee’s, as the MORE you pay LOWER employees, they BUY MORE of your stuff, and its deductible.
IF’ insted of paying 1 person the EXTRA BONUS of $1,000,000, you paid 400 employees an EXTRA $1 per hour.
3. BUYING POWER, of the poor 60%, over the RICH 1%..The POOR buy MORE STUFF.
Chris.
you know NOTHING about medicare. Making $100-600 per month KICKS YOU OUT of medicare, or they charge you 20% AND a monthly deductible of $80-100..
IF 1/2 of the PROFITS from the last 10-15 years had GONE to paying BETTER wages on the BOTTOM, it would have PAID everything.. NOTHING would have happened. THE LOANS would have been PAID.. The 1/2 profits from the MAJOR corps in the last 15 years, SHOULD HAVE RAISED the lowest paid employees,,AT LEAST $3-10 per hour.
SO,
if the CORPS arent going to do the RIGHT THING, the GOV should FORCE IT TO HAPPEN.
“Only the rich people own homes?”
In the vast majority of the country, the standard deduction wins out over the mortgage deduction big time. The mortgage subsidy benefits the rich and the stupid who pay $500K+ for tract houses in California. So let’s end this dumb subsidy.
#23 — vote some third party, any third party, but vote regardless, when you don’t vote D or R you aren’t responsible for the continuing malfeasance —– when the electorate that got us where we are figures out that they are destroying the US and decide to never vote R or D again (including not voting for anyone who ever held a D or R office) then possibly we can salvage this country.
#27,
say it like this..
“Only the rich people own homes?”
CORRECT..
and how many persons in the USA RENT?
How many RICH persons OWN MORE then 1 rental property?
Its constant, perpetual LIQUID income.
Even if you hand the control, renting, repair, of the buildings/property to another corp, and ONLY get $100 per month.. 100 houses is $10,000 per month.
the article really doesn’t explain the problem of why the tax code encourages debt over other types of financing. Investments in equipment are tax deductible, and this is generally considered a good thing. Now why is it better to borrow the money rather than raise stock?
#26 I know a high income 65 year old who is being forced into medicare because of the way they penalize you if you DON’T accept it as soon as you are eligible. So I don’t know who gets kicked out. I mentioned walmart’s propensity to hire old people as greeters to avoid paying health benefits. I doubt walmart greeters make enough bread to hit any upper limits.
#25 I get your distinction, and agree wholeheartedly, between progressive and regressive tax schemes. We’ve had top marginal rates higher than 80% and had no ill effects from it. The current top rate, especially considering the way the rich can structure their money to avoid taxes, is a complete joke. We are creating a system where the idiot children of the rich have an unassailable advantage over the hardscrabble climbers who made this country great.
One thing I think you are overestimating is the degree that companies can pass costs onto consumers. Even before the current downturn there was extreme pressure on prices. Now with slack demand it is even more true.
Higher corporate taxes would need to be accompanied by pressure on Washington not to cut sweetheart deals for the usual suspects.