The unspoken political truth about debt

30th March 2015

Author: Andrew McNally

No politician talks about why companies create so much debt—or has a plan to deal with the problem.

Leaving aside credit creation, supported by central banks, there is no greater structural bias in favour of debt finance than corporate taxation; for much of the world, there is enormous support for the use of debt in corporations. Interest expenses on debt finance have been tax deductible for US corporations since 1918, when this allowance was introduced as a temporary measure to compensate company owners for an excess-profit tax. When the excess-profit tax was repealed in 1921, the tax deductibility of interest mysteriously remained, without explanation. The vast majority of countries around the world now operate the same system—the incentive for companies to use debt is overwhelming. Despite tax systems already being loaded in its favour, authorities further cleared the path for debt finance. In the UK, for example, advance corporation tax—a complex system that levelled the playing field for equity finance by allowing pension funds to claim tax back on dividend income, so making equity ownership more attractive—was abolished by a Labour chancellor in 1997, a process that had been started by a Conservative chancellor in 1993 as an inconspicuous way to raise tax revenue. …

Read full article in Prospect


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