In his December 20 article, "The Tax Reform No One Talks About", author Scott MacDonald uses a number of dubious assumptions and misleading examples to recommend eliminating interest deductibility from the tax code. The truth is that such a reform would hamper growth and harm the US economy.
MacDonald's arguments are based on an anecdotal assumption that current tax law encourages irresponsible debt, but research shows that this is more perception than reality. Leading economists from Duke, UPenn and Washington University collaborated on a study that found that tax legislation had no significant impact on leverage. In addition, Nobel Prize winner Merton Miller found that companies outside the financial services sector have no relationship between interest deductibility and leverage.
Even if efforts were made to balance the treatment of debt and equity financing in the tax code, it would not be the right way to reduce or eliminate the deductibility of interest. Instead of introducing a new tax on corporate interest expenses – a normal business expense – policymakers should focus on eliminating the double taxation of equity financing. Two mistakes make no right when it comes to taxes.
Finally, MacDonald highlights some failed investments without mentioning a single case in which a company has benefited from debt financing. Of course, the examples of the latter are far more numerous than the former. In fact, four out of five small businesses and three out of four startups rely on outside funding to help, for example, discuss payrolls or compete for large orders. The bottom line is that debt financing enables companies of all sizes to realize their potential, which leads to larger investments and job creation across the economy. And that while maintaining the capital participation of business owners.
As every investor knows, risk is a hallmark of entrepreneurship. While MacDonald is trying to paint a picture where debt financing leads to wasteful borrowing, it just isn't. Punishing companies for borrowing to expand or meet their obligations would discourage investment and hinder growth – far from the stated goals of the tax reform.
Mac O & # 39; Brien, Spokesman, BUILD Coalition
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