One of the biggest defects in the U.S. tax code is that it encourages companies to finance themselves by borrowing rather than by issuing equity. Correcting this bias should be a top priority for President Donald Trump and Republicans in Congress as they merge their plans for tax reform.
The tax preference for debt over equity is neither new nor confined to the U.S., but that doesn’t make it good policy. Many governments treat interest on debt as a deductible expense, so payments to creditors don’t get taxed while payments to shareholders do. This tilting of incentives has no good justification and can be dangerous.