A Simple Tax Proposal to Improve Financial Stability — The Harvard Law School Forum on Corporate Governance

Small business of-interest.  The perspective isn’t what is so unusual in this article — in my opinion, it is the definitions insights and solutions put forth.   What do you think?  Cash management

Excerpt:  It is hard to imagine a financial crisis that is not ultimately caused by creditors who had taken on too much debt. Debt is the root cause of most corporate financial failures and, if a snowball effect sets in, the root cause of financial system failure. Of course, debt also has advantages. Without debt, many privately and socially valuable projects could never be undertaken. Still, it is our current tax system that has pushed our economy to be too levered. Now is the time to address the problem—before it will again be too late.

From a creditor’s perspective, the two key advantages of debt are the tax deductibility of interest payments and the ability of lenders to foreclose on non-performing borrowers (which makes it in their interest to extend credit to begin with). Although both factors contribute greatly to the incentives of the borrower to take on debt, there is one important difference between them: the tax deductibility of debt is not socially valuable.

To explain this issue, let’s abstract away from the beneficial real effects of debt and consider only the tax component

Read full article via A Simple Tax Proposal to Improve Financial Stability — The Harvard Law School Forum on Corporate Governance and Financial Regulation.

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