The tax-free debt great distortion

The tax-free debt great distortion. Subsidies that make borrowing irresistible need to be phased out

Debt has many wonderful qualities—allowing firms to invest and individuals to benefit today from tomorrow’s income. But the tax subsidies have tilted the economy in a woeful direction. They have created a financial system that is prone to crises and biased against productive investment; they have reduced economic growth and worsened inequality. They are a man-made distortion and they need to be fixed.

A neutral tax system would also lead to more efficient choices by savers and lenders. Today 60% of bank lending in rich countries is for mortgages. Without a tax break, people would borrow less to buy houses and banks would lend less against property. Investment in new ideas and businesses that enhance productivity would become relatively more attractive, in turn boosting economic growth.

In 2007, before the financial crisis led to the slashing of interest rates, the annual value of the forgone tax revenues in Europe was around 3% of GDP—or $510 billion—and in America almost 5% of GDP—or $725 billion. That means governments on both sides of the Atlantic were spending more on cheapening the cost of debt than on defence. Even today, with interest rates close to zero, America’s debt subsidies cost the federal government over 2% of GDP—as much as it spends on all its policies to help the poor.

http://www.economist.com/news/leaders/21651213-subsidies-make-borrowing-irresistible-need-be-phased-out-great-distortion?fsrc=nlw|newe|18-05-2015|

 

 

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