The Importance of Volcker

There’s a curious coincidence of newspaper stories today: just as the NYT’s Louis Uchitelle writes a long piece about Paul Volcker being marginalized, the WSJ runs a story about how he could end up being responsible for what would arguably be the single most important piece of economic policy implemented by the Obama administration.

Here’s how Uchitelle ends his piece:

He travels infrequently to Washington, he says, and when he does, the visits are too short to bother with the office. The advisory board has been asked to study, amid other issues, the tax law on corporate profits earned overseas, hardly a headline concern.

So Mr. Volcker scoffs at the reports that he is losing clout. “I did not have influence to start with,” he said.

Well yes, the tax law on overseas corporate profits is one of the issues that Volcker is looking at. But he’s also, says the WSJ, looking at something much bigger and much more far-reaching:

White House advisers are examining whether to curb the corporate tax code’s bias toward raising money from tax-deductible debt issues rather than from stock sales…

Tax experts for decades have bemoaned the tax code’s bias toward debt over equity: Interest on most corporate debt is tax deductible, while dividend payments are not.

“The disparity between debt and equity financing encourages corporations to finance themselves more heavily through borrowing. This leverage in turn increases the financial fragility of the economy, an effect we are seeing quite dramatically today,” Jason Furman, now deputy director of Mr. Obama’s National Economic Council, told a congressional panel last year.

This is something I’ve been pushing for a while, and it’s a really good idea. As the WSJ article shows, the US, with its 39.1% corporate tax rate, manages to raise just 3.2% of GDP through corporate taxes. Meanwhile, Australia, with a 30% corporate tax rate, raises 6.6% of GDP from corporate taxes. If Volcker starts taxing debt as well as equity, that would do wonders for the US fisc, and would reduce the systemic danger that debt poses to the economy. What’s not to love?

Comments

[Tony Petroski:]

Mr. Salmon. We know the Citizens of the World love taxes and balanced budgets. If you want to see what is behind the Australian disparity, check out Supply-Side 001 at your local college.

As for Volker, he is an honorable gentleman who deserves better, but was set up by the Obama folk as window dressing on their revolution.

Oct 21 05:10 PM

[Wildebeest:]

"Meanwhile, Australia, with a 30% corporate tax rate, raises 6.6% of GDP from corporate taxes."

Relevance?? Interest on corporate debt is tax deductible in Australia isn't it?

Oct 21 05:24 PM

[a fat panda:]

What is not to love? Your idea that we should tax both debt and equity. What is not to love about making them equally tax-exempt? We could treat dividends on equal terms with interest.

Oct 21 05:37 PM

[Denis Gould:]

What Volcker knew was that there comes a point when you just have to take the pain, so it is no wonder that he is being marginalised. The current team is determined to stop the inevitable and necessary recession no matter what the consequences. Deliberate bubble blowing and multi-decade destruction of public finances to avoid a necessary and cathartic cleansing of the system just makes matters worse in the long run.

Oct 21 10:08 PM

[Sevens:]

If I'm grasping the jist of your idea, it's that we should tax corporate debt to keep it to a manageable level or keep it from becoming a systemic risk. Fair enough. So, why wouldn't you cut through the corp/personal veil and just tax spending? Out of control spending is what leads to systemic debt risk, regardless of whether it's commercial, consumer or government.
Yeah, yeah, I know, it disproportionately affects poor/fixed income folks, so you give them the prebate or whatever the FairTax folks call it. Still a much more effective and simplistic way to curb debt bubbles than trying to focus on commercial only because companies can't vote, while ignoring consumer debt...as well as govt debt/unfunded liabilities which is the utter epitome of systemic risk.

Oct 22 10:48 AM

[John Consen...:]

Sound idea. It's also time to call the bluff that US coporations PAY corporate taxes at 39.1%. They pay at a much less rate after all the corporate tax code deductions, exemptions, etc. are exhausted by their tax attorneys.

Oct 23 02:01 AM

[jimmy46:]

What a stupid idea,
The cost of capital is a cost of business.
Just like labor or materials.

The error is in taxing dividend payments.
Debt & equity should have the same tax treatment.

As for low tax receipts from corporations,
that's because of all the tax loopholes the lobbyist's have gotten from a corrupt congress.

Oct 23 04:03 PM