Tuesday, January 31, 2012

The letter the New Yorker didn't want you to read!

To the Editor:

In “Private Inequity” (January 30), James Surowiecki proposes addressing private-equity’s “financial gimmickry” by capping the deductibility of corporate debt and closing the carried interest loophole. That sounds complicated and politically challenging. Reformers would be better-served by a policy that simply coupled an increase in the capital gains and dividends tax rates with an offsetting reduction in corporate income taxes. It may seem counterintuitive to lower corporate income taxes, but doing so will reduce corporate debt levels because it makes debt more expensive (the lower the tax rate, the lower the value of a deduction). The benefits extend beyond this, however, as it instantly improves the business case for every potential domestic corporate investment, generating immediate stimulus to our economy and permanently tilting the balance away from offshoring jobs.  Meanwhile, the offsetting, tax revenue-neutral nature of this approach leaves shareholders unaffected by the change, preempting the Republican concern that higher taxes on capital gains and dividends dampens investment. Moreover, it complements Democratic efforts to raise taxes on wealthy individuals because, to the extent that it encourages businesses to organize as corporations, it disarms the well-worn Republican charge that raising marginal tax rates on individuals hurts otherwise job-creating businesses filing under the individual tax code. For all of these reasons, offsetting higher taxes on capital gains and dividends with lower taxes on corporate income is good policy.

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