Taxation of Debt and Equity: Setting the Record Straight
The tax code tilts in favor of debt compared with equity because it handicaps equity with the second layer of tax, not because debt receives preferential treatment. Therefore, it does not make sense to equalize their tax treatment by eliminating interest deductibility for businesses. Doing so would further suppress economic growth, job creation, and wage increases. Instead, Congress should end the double taxation of income earned through equity financing in tax reform by eliminating taxes on saving and investment, including capital gains and dividends. A consumption tax, like the traditional flat tax, the New Flat Tax, a national retail sales tax, or a hybrid of these approaches would accomplish this. This would level the playing field for debt financing and equity financing in a way that would help American families by boosting economic growth.