The latest AABA workshop call for papers
reminds us of an issue that we have been plugging for some time - the tax deductibility of debt. This is a crucially important issue which we hope will be addressed by at least some of those presenting papers. We covered the issue
recently, and it has been hard to find serious people who disagree with us: most recently, TJN's director John Christensen recently found
himself putting this idea to Dan Mobley of Standard Chartered Bank in an online debate, who responded:
"We are in danger of furious agreement! Abolishing tax relief on debt interest is long overdue. "
We are now pleased to see this now being pushed in The Guardian,
in a piece looking at how the UK ought to be looking at combating short-termism in the business and investment world.
"If the coalition really wanted to reverse the trend towards short-term thinking, it would change the rules on the tax-deductibility of interest since the current rules encourage companies to load up with debt to reduce their tax bills.
Many of the corporate disaster stories of the past two years can be explained that way. Chief executives, citing the fear of takeover by private equity, preferred to join the leverage club and seek instant gratification and popularity in the form of special dividends and share buy-backs. The cost was the accumulation of dangerous levels of debt that impaired long-term investment after the crash of 2007-08.
It would be a (relatively) simple matter to phase out tax-deductibility in return for a bigger cut in corporation tax than the coalition currently plans. Life would become harder for the buyout brigade; the takeover game would be transformed, which is what Cable seems to wish, and chief executives would be challenged to find more imaginative uses for capital than balance-sheet gymnastics.
Cable did not once mention the tax rules as a cause of short-termism in his speech yesterday. Maybe his review will do better."
Let's hope this idea continues to get support.