Virtually every company in America relies on credit to finance investments–be it to upgrade equipment, open new facilities, meet payroll, or hire more talent. The ability to deduct the interest expense related to the funding of these activities has allowed businesses across all sectors of the U.S. economy to grow and remain competitive for close to 100 years.
Last week, the Tax Policy Center hosted an event called “Are Entrepreneurs Overtaxed?“ where panelists warned about the dangers of eliminating, or limiting, interest deductibility (ID). Panelist Susan Morse, a professor at the University of Texas Law School, said “getting rid of interest deductions may actually be reducing the value of firms and therefore taxing entrepreneurs more.”
By changing the tax treatment of interest on loans, rather than only taxing profits, the government would be imposing a new cost on businesses that is likely to impede their ability to grow as they have in the past.
Some have proposed full expensing of capital investment as a replacement for ID, but this is not an appropriate substitute for a number of reasons. Chief among them, as Institute Fellow and Tax Policy Center Co-director Eric Toder noted, under current tax plans “most small businesses–whether entrepreneurs or not–get the benefit of expensing for most of their machinery and equipment, so getting the extension of expensing doesn’t help them at all.”
Indeed, small businesses are already able to expense annual capital expenditures up to $500,000. The elimination of ID would only burden these companies, which are the engine of U.S. economic growth, with greater costs. And, of course, you can’t expense what you can’t afford.
By eliminating interest deductibility, Congress will not only hurt the current business environment but also risk destabilizing it in the future. When interest rates inevitably begin to rise, the cost of credit will only go up. Without the ability to deduct borrowing costs, companies will feel the pain of rising interest rates even more acutely. This will undoubtedly influence their investment decisions—and not for the better.
In the end, the reduction or elimination of ID is bad tax policy that would reduce America’s long-term growth prospects.