A 100-Year Chance to Shake Up Debt and Taxes
Deductible interest grew out of the crises of 1918. The Covid-19 upheaval should be used to roll it back.
Making the world safe for leverage.
Photographer: FPG/Getty Images
For 100 years now, capitalism has had a pro-leverage bias. Unlike dividends, which are paid only after the state has taken its share of earnings, interest is deducted from pretax profit, shrinking the pie available to the government.
This accounting oddity, which treats debt capital more favorably than equity, has driven the leveraged buyout industry, led to a correction in a foundational paper by a pair of Nobel economics winners, and played a role in the 2008 financial crisis. Disaffection with this anomaly has long swirled as an undercurrent, especially in tax-starved developing economies. The coronavirus is reheating the debate.