Another step to eliminating debtscapades

It’s obvious that that there is not one silver bullet that will reform our financial system to prevent a repeat of this crisis, but one common theme amongst several proposals is that we need to get away from being a debt-based society.  Everyone has become way too inured to debt at every level: paying off a credit card over several months, paying only 3% down for a FHA mortgage (personal leverage of 33:1!), running perpetual budget deficits, not saving enough of our paychecks, etc.  Another manifestation of our debt-intoxication that needs to change is the deduction of interest paid on corporate debt from corporate income tax.

This preferential treatment of debt over equity makes it more attractive for companies (and private equity firms) to take on debt instead of raising equity or using cash flow to fund corporate activities.  It’s of course hugely profitable for bankers running these deals, PE people stripping assets from companies, or corporate chieftains enlarging their company.  It’s not clear that it’s such useful treatment for anyone else.

Felix Salmon links to a CBO report which points out how regressive this debt treatment is.  This is the key chart:

Let the government pay rich people to take on debt

The alarming number is -6.4: for every $100 of debt a corporation takes on, it receives $6.4 from the government.  This number of course is an average, but the point is the same: our tax code means tax-paying Americans subsidize the dangerous, unproductive debtscapades of financiers and corporate America.  So instead of debt showing up as cost to corporations, it is often revenue-generating!  Until we collectively have an aversion to debt and treat it as the evil that it is, we’re doomed to repeat the horrors of the previous 30 years.