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A Taxing Distortion

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I’m attending now the 27th annual Cato Institute Monetary Conference [2].

Just before the conference kicked off this morning at 9am (EST), The Economist‘s Zanny Minton Beddoes suggested that I do some live blogging while here.  I hadn’t thought to do that.  (I’m here to moderate one of the afternoon panels.)

But, what the heck, here’s at least one post coming live at you from the conference……

….

Following an outstanding opening address by Allan Meltzer, the first panel featured Zanny Minton Beddoes, George Melloan, Benn Steil, and Peter Wallison.  Fine presentations all.

In his remarks, Benn Steil mentioned a fact that I was (to my chagrin) unaware of, but it strikes me – as it strikes Steil – as being one important reason for excessive build-up of debt in America.  According to page 8 of this 2005 CBO study [3],

The resulting [tax] rate on equity-financed corporate capital income is 36.1 percent and that on debt-financed corporate capital income is -6.4 percent, a difference of 42.5 percentage points. The rate on equity-financed corporate capital income is higher than the statutory corporate tax rate because of the extra tax imposed on dividends and capital gains at the individual level.

Such a huge deviation from neutrality in taxing equity-financed corporate income and in taxing debt-financed corporate income cannot help but to distort financing decisions toward debt – perhaps dangerously so.

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