Interest deductibility is a component of the tax code that has helped businesses of all sizes use debt to finance investments. Typically, we think of large companies using debt. This is certainly true especially amongst firms with large capital-intensive investment needs. Businesses in the manufacturing, transportation, and construction industries have large capital needs and therefore, interest deductibility is vital to keeping the costs of these growth-enhancing and job-creating investments down.
However, it’s not just these large, capital-intensive businesses that use interest deductibility. Research by Rebel Cole and Tatyana Sokolyk found that 75 percent of start-ups utilize debt financing to get off the ground. Most of these firms use personal credit, i.e. credit cards, but 44 percent rely on bank loans and another 24 percent rely on trade credit. Debt is essential to these firms as well, and limiting interest deductibility would raise costs on start-ups.
What would this mean for our economy?
Research by John Haltiwanger, Ron Jarmin, and Javier Miranda found that young start-up companies are the United States’ most prolific job creators. In fact, while start-up firms account for only 3 percent of employment, they account for roughly 20 percent of job creation. Unfortunately, start-ups are down. The percentage of total firms that are startups has declined from 10 percent to 8 percent in the last decade. This decline is one reason why our economy continues to struggle.
These firms are the engine of the U.S. economy and limiting interest would only further hamper start-ups’ abilities to innovate, grow our economy, and create jobs.
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