Why the bias for debt over equity is hard to dislodge

THE NICETIESOECDIMF of corporate finance rarely attract the attention of activists. It is rarer still that those at either end of the political spectrum agree on the need for change. When it comes to the tax system’s preferential treatment for debt over equity, however, both the left-wing Tax Justice Network and the fiscally conservative Tax Foundation agree that the “debt bias” needs correcting. But the degree of consensus belies the difficulty of getting it done.Most countries that levy taxes on corporate profits treat debt more favourably than equity, largely because they allow interest payments, like other costs, to be deducted from tax bills. That gives companies a huge incentive to borrow, rather than to fund themselves through equity. In America, Britain, Germany and Japan, debt-based finance is taxed at rates that are 3.8-6 percentage points lower than those on equity investments, according to the . The result is more indebtedness than would otherwise have been the case. According to the Securities Industry and Financial Markets Association, the value of outstanding debt securities amounts to $123trn, exceeding the $106trn in listed equities globally. The estimated in 2016 that the debt bias explained as much as 20% of investment banks’ total leverage.