Leveling the Playing Field Between Debt and Equity

Chris Farrell has a short Bloomberg Businessweek column on why we should address the debt bias in the U.S. tax system:

A 2007 Treasury Department report noted that the U. S. had the largest disparity between debt and equity effective marginal tax rates in the OECD. “The incoherence in the taxation of capital income has serious economic consequences, including the inefficient encouragement to over-invest in housing and to bear risk, as well as a misallocation of risk,” writes Joel Slemrod, economist and tax specialist at the University of Michigan’s Stephen M. Ross School of Business in a conference paper, “Lessons for Tax Policy in the Great Recession.

Towards the end of the column, Farrell makes a brief reference to one proposal that would address debt bias, a comprehensive business income tax (CBIT). In 2009, the American Institute of Certified Public Accountants (AICPA) provided a description of the CBIT as one of several tax reform options:

The comprehensive business income tax (CBIT) is a 1992 Treasury proposal for equalizing the tax treatment of debt and equity. The income of all business entities, corporate and noncorporate, would be taxed at the entity level at a flat rate of tax, but when business income is distributed as interest or dividends, it would not be taxed when received by investors or debt-holders. Capital assets would continue to be depreciated rather than expensed.

Recent cuts in the tax rates for capital gains and dividend income have reduced double taxation of corporate income and can be viewed as a move toward the CBIT approach. As outlined in the 1992 Treasury proposal, the CBIT has no individual component. Combining the CBIT with an individual tax with flat tax features would move the U.S. tax system close to a full consumption tax.

Corporate tax reform will be a key issue come next year, and one hopes that Congress will take debt bias seriously. 

Reihan Salam — Reihan Salam is executive editor of National Review and a National Review Institute policy fellow.

Most Popular

Culture

Courage: The Greatest of Virtues

EDITOR’S NOTE: The following is Jonah Goldberg’s weekly “news”letter, the G-File. Subscribe here to get the G-File delivered to your inbox on Fridays. Dear Reader (Or Listener), As the reporter assigned the job of writing the article about all of Sidney Blumenthal’s friends and supporters told his ... Read More
Immigration

My American Dream

This morning, at 8 a.m., I did something I’ve wanted to do for as long as I can remember: I became an American. I first applied for a visa in early 2011, and since then I have slowly worked my way through the system — first as a visa-holder, then as a permanent resident (green card), and, finally, as a ... Read More
U.S.

The Gun-Control Debate Could Break America

Last night, the nation witnessed what looked a lot like an extended version of the famous “two minutes hate” from George Orwell’s novel 1984. During a CNN town hall on gun control, a furious crowd of Americans jeered at two conservatives, Marco Rubio and Dana Loesch, who stood in defense of the Second ... Read More