Debt Payments are Deductable for Businesses and so Debt Grows

ProPublica is one of the great resources in the struggle to see through the muddy, under-oxygenated waters in which the big corporations swim.  Here is a piece, published in the NY Times, as well as elsewhere, that will shine a bright light through the dirt.

Thanks to a leaked video, we know that Mitt Romney divides the country into those who pay taxes and those who don’t, the makers and the moochers.

There is one perhaps surprising group you can put in the latter category: the nation’s banks. Sure, banks pay taxes, but they pay a lot less thanks to a giant and underappreciated distortion in our nation’s tax code. Moreover, this tax code distortion makes the financial system and the economy more fragile, prone to bankruptcies and runs. Banks profit, and the economy teeters. Great bargain, huh?

It’s the tax code’s favoring of debt over equity.

For businesses, debt interest payments are tax deductible; equity payments, like when a company pays out a dividend, are not. At the margin, this encourages entities to take on more debt than they otherwise would, as Steven M. Davidoffnoted in a Deal Professor column earlier this year. More debt not only makes companies more vulnerable to bankruptcy but also makes investors more susceptible to panics, when they withdraw their capital en masse. More equity would make the world more stable.

Jesse Eisinger: NY Times / ProPublica

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