How would Sensible Tax Reform affect the astronomical level of debt in the U.S.?
Businesses will have a wonderful opportunity to reduce their debt levels with the introduction of STR. Costs will be down. Profits will be up. The cost of equity financing (i.e., selling new issues of common stock) will decline, since dividends will no longer be taxable to the company (or to the recipient either). All of these factors will encourage businesses to reduce their debt levels. In addition, much of the remaining corporate debt will be refinanced at the lower interest rates that STR will bring. Households will also experience lower interest rates. The interest on personal debt, however, will be subject to the federal consumption tax. Therefore, the effective cost of borrowing for consumers will rise under STR. The tax will encourage Americans to be more frugal, borrow less and save more.
