| Yes, and why shouldn't it be so? Off the top of my head, two simple arguments why excluding interest from business expenses does not make sense, there probably are a bunch more: 1. Double taxation - if I my operating profit is $100 but I pay all $100 in interest, then that $100 gets taxed twice; when I receive it and when the lender receives it. Such double taxation is bad because it arbitrarily changes depending on where you put the "legal entity boundary" - if the "earner" and "lender" were a single entity, then they would pay much less taxes; so such a double taxation regime would result in large financial incentives towards vertical integration of conglomerates and artificially punish fragmented businesses, which is generally opposite from what we'd want to facilitate. 2. Introducing asymmetry between owning and renting assets. Rent is considered a business expense (if the proposal wants to change that as well, then it's a much bigger change with other considerations), so any current scenario where a company is borrowing money and using it to buy capital assets (buildings/cars/land/machinery/whatever) can be replaced with an equivalent deal where the "lender" is buying the assets and leasing them. If interest does not reduce taxable income but rent does, then a huge portion of commercial credit would be restructured overnight to leasing for an arbitrary artificial reason, so you would not really gain that much extra tax revenue but would introduce all kinds of bad economic incentives (it's generally better for all the business domain-specific assets such as custom machinery to be on the balance sheets of the companies where they're useful, not belonging to generic lenders, especially in various economic crisis situations) for no good reason. If you want to tax companies more, just raise the tax rate. Adding various artificial rule differences just adds complexity and all kinds of perverse incentives to structure transactions in weird ways so that they fit the arbitrary distinctions created by these rules. Saying "today, interest is a special kind of expense that's taxed more" is effectively a subsidy to law and accounting firms to restructure all the corporations so that they do the same business without having transactions that technically are "interest". Case in point, Islamic banking system where interest is prohibited as such - lenders still earn the same money from lending (e.g. Murabahah gets you almost the same end situation as "normal" western loans), it just has to be structured in complicated ways. |