Wednesday, July 15, 2009

Debt versus equity and the scandal of deductions

Recently we pointed to the IMF waking up to the idea that distortions in international taxation might be, to use the IMF's ugly term, "macro-relevant" in terms of the economic crisis. In other words, these have huge systemic effects. As our blog about this new report notes,

"Why did it take so long for the penny to drop at the IMF of all places? . . . It is hard to exaggerate the extent to which tax arbitrage has shaped cross-border trade and investment flows"

And the IMF notes something specific:

"Divergences in national tax rates, bases, and practices create substantial opportunities for international tax arbitrage, further increasing opacity and reinforcing tax biases to debt."

This is important. When businesses raise money, how do they do it? One way is to resort to equity (issuing shares to the public and so on.) One is to borrow: to use debt. The economic crisis has taught us that the latter - debt - is the dangerous one. And yet tax policies favour debt, the world over.

This is an issue that we intend to revisit: the tax treatment of debt, versus the tax treatment of equity. (A comment article in the FT yesterday had some radical approaches - but that is not the point of this blog.)

The main point of this blog is to point to something that Richard Murphy has written today, entitled "Rebuilding the bias to equity." Read it.

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