From Mr Alex J. Pollock.
Sir, Your report “US lawmakers weigh up reform of corporate tax to narrow investment gap” (March 25) shows how easy politics makes it to get things exactly backwards. On top of the existing mistake of double taxation of dividends, the Congressmen propose to add the mistake of double taxation of interest – a fine project to increase the cost of capital and reduce investment!
The better way to balance the tax treatment of debt and equity is straightforward: eliminate double taxation of dividends by making cash dividends paid a tax deduction. Make dividends be taxed exactly once, as ordinary income to the recipient, just as interest already is. This would achieve a very desirable reduction in the distortion of capital structure and the incentive to run up debt and leverage, which are now induced by the tax regime.
Alex J. Pollock, Resident Fellow, American Enterprise Institute, Washington, DC, US