Martin Sullivan, an influential voice at the non-partisan Tax Notes, this morning offered a blog post http://www.tax.com/taxcom/taxblog.nsf/Permalink/MSUN-8QYU57?OpenDocument attacking the corporate interest deduction, the tax break that Mitt Romney’s Bain Capital and other private equity firms use to help finance leveraged buyouts.
He quotes The Economist magazine: “(T)hough the private-equity people may have walked off with the loot, America’s tax code was partly to blame, because it encourages this behavior.” And William D. Cohan, author of the recently released "Money and Power: How Goldman Sachs Came to Rule the World": “There would be no private equity/LBO industry without this huge tax benefit.” Even Alex Brill, a former Republican staffer on the House Ways and Means Committee, who is now at the conservative American Enterprise Institute, is quoted arguing that “excessive leverage induced by the tax subsidy for debt financing may lead to more volatile business cycles and greater risk of a financial crisis affecting the economy.”
It would have been nice if Sullivan, who frequently testifies on corporate tax issues on Capitol Hill, had noted that The Fiscal Times was out front on this issue. Earlier this month, TFT, quoting a Joint Committee on Taxation report, reported that the business interest deduction distorts economic activity by encouraging companies to raise capital through debt rather than equity. That makes firms more vulnerable in economic downturns because debt must be repaid come hell or high water, while stockholders can be told to wait out tough times.
Debt-financed takeovers also encourage excessive CEO compensation, TFT noted, since many senior executives who participate in leveraged buyouts receive stock options in the newly acquired firms. That can later be resold for huge gains when the companies are either resold to the public or to other private investors.
John Buckley, professor of law at Georgetown and a former Democratic staffer on Ways and Means, stated the obvious to Sullivan: corporate tax reform depends on challenging the corporate interest deduction. “The interest deduction and advertising expenses . . . are the only other items of large revenue that would have to be used in the tax reform plan focused on a 25 percent (corporate) rate,” he said.
Don’t expect much action on this issue before the November election. But campaign reporters, when they grow tired of reporting the horse race, should question the potential nominees in the Republican primaries where they stand on the issue, as well as President Obama, who called for corporate tax reform in his State of the Union Address last week. Even the corporate lobbying group created to push lower rates – the RATE Coalition headed by former Reagan/Bush policy domestic adviser James Pinkerton – admits in its statement of principles that “we understand the budget implications of lowering the rate. As such, if necessary to facilitate a meaningful reduction in the corporate tax rate, corporate tax base-broadeners should be on the table.”
Between corporations and the candidates, someone ought to start spelling out which ones.