What was the original justification for not charging tax on interest? And specifically on interest paid by corporations?
In pure mainstream economic theory, shouldn't this be thought of as a grave distortion for no gain that economists should be champing at the bit to remove? I mean, shouldn't companies only borrow when the cost of borrowing is less than the rate of profit? Bagehot in _Lombard Street_ has a lovely description of how once that obtains, not only will there be an incentive borrow, but highly leveraged firms will soon dominate an industry, since all will make greater returns on their invested capital. And of course they will then drive down the profit rate, leading to a similar profit rate but with greater average leverage. So why on earth would one want to encourage such a process?
And if one was in the business of "reducing economic distortations," wouldn't removing the tax exemption on corporate income tax make more "pure economic sense" than removing the tax on dividends? Especially in a time of fiscal deficits, since it would be revenue positive?
Lastly, can I assume that, just as removing the dividend tax would have very little short term stimulus value, so restoring the tax to interest would have very little short term drag value?
Michael