The FT gets it right on interest

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The FT has got on the right track again in an article today that says:

The depth of the recent financial crisis was largely due to excessively high leverage, or debt-to-equity ratios. Both banks and corporates were heavily indebted at the onset of the financial crisis as low interest rates promoted cheap debt financing.

But there is also a structural bias towards debt financing that encourages companies to take on debt rather than equity. While the cost of debt (interest) is deductible from corporate tax, the cost of equity (dividends) is not. In the wake of the financial crisis, this needs to be addressed – and with urgency.

This is a complex area for reform because of the interaction with personal taxation, but that does not mean it need not be addressed.

Now is the time to do so.