Corporate America’s love affair with debt is driven by a heavy subsidy, courtesy of the federal tax code. It’s an unhealthy preference that the Obama administration is now reviewing.
The problem arises because the interest that corporations pay on their debt is deductible on their federal taxes.
To understand the effect of this deduction, imagine if you could deduct the interest you pay on your debt. I am not just talking about the deduction on your home mortgage. This would be a deduction for all of the interest paid on your credit card bills, auto loans and any other loans you had, including the one from Uncle Mikey….
Well, the IRC encourages consumers to take on mortgage debt. We’ve seen what mess that’s gotten us into when the consumer takes on more debt than he can afford.
Very confusing article. Let’s not forget why Obama wants more corporate income. It gets paid out in dividends which are taxed twice, once to the corporation as income and again as income (soon to be at a top marginal rate of 43.5%) to the person receiving the dividends. And, if said person invests these dividends, they can be taxed another time at 45% when the person dies. Oh, and if you think corporations can just hang on to all their profits, think again. There’s a little thing instituted by Roosevelt during the Depression called the excess retained earnings tax, implemented to punish those evil companies from not investing enough in economic recovery by paying out dividends to be taxed.
One glaring omission by the author is that the market punishes companies who have too high of a debt/equity ratio. Also, debt regularly has to be renegotiated and when interest rates begin to rise, the company may have difficulty servicing its debt.
The bottom line is that the biggest U.S. problem is not a tax problem, it’s a spending problem.
Large corporation fought the creation of a 100% dividends paid deduction because they did not want the increased pressure to distribute their income to their shareholders. Which to me means they gave up the double tax argument.
Further, the double tax argument does not apply to Sub S corporations, which are most of the small corporations in the country (small being relative as S corporations can have up to 100 shareholders with all members of the same family treated as one shareholder. Nor does it apply to closely held c corporations, as they can distribute their income in the form of salary or profit sharing contributions to owners.
While our nominal corporate tax rate is high, our effective rates are not. Effective corporate income taxes are near a post WWII low and our corporate income taxes as a percentage of GDP are among the lowest of all industrialized nations. They are about 10% of what Norway collects, and they are now the richest per capita nation on earth and Forbes Magazine rated them ahead of the US in its listing of Best Countries for Business. The number one country for business was Canada. As a percentage of GDP they collect twice the corporate taxes we do.
As for the 45% when a person dies, only if the married couple’s net worth exceeds 10 million dollars. A number that with minimal planning can be streached to about 20 million, and which does not include small family owned businesses and family farms; for which there are exceptions.
Dividends are a company’s admission that the shareholder can invest the money more efficiently than can the company. Growth has basically stopped.