On Tue, 11 Feb 2003, Jordan Hayes wrote:
> > What was the original justification for not charging tax on interest?
>
> The same one that's for any other deductible expense: it's a cost of
> generating revenue.
Fair enough. Let me put that differently: is there any justification in economic theory for not charging corporations tax on their interest payments? It seems to me that mainstream economists should consider this a distortion, since in pure theory, corporations should only borrow when the cost of capital is lower than the expected profit. It seems like a distortion that is both obvious and pernicious (and not just theoretically -- many ridiculous deals in the 80s only happened because of it). Is it a truism among mainstream economists that in a perfect world it would be removed?
Michael