Home' Trinidad and Tobago Guardian : May 17th 2015 Contents SBG14 FINANCE
SUNDAY BUSINESS GUARDIAN www.guardian.co.tt MAY 17 • 2015
The way that black holes
bend light s path through
space cannot be
smoothed out by human
ingenuity. By contrast, a
vast distortion in the
world economy is wholly
It is the subsidy that governments give to
debt. Half the rich world s governments allow
their citizens to deduct the interest payments
on mortgages from their taxable income.
Almost all countries allow firms to write off
payments on their borrowing against taxable
earnings. It sounds prosaic, but the cost---and
the harm---is immense.
In 2007, before the financial crisis led to
the slashing of interest rates, the annual value
of the forgone tax revenues in Europe was
around three per cent of GDP, or US$510 bil-
lion, and in America almost 5.0 per cent of
GDP, or US$725 billion. That means that gov-
ernments on both sides of the Atlantic were
spending more on cheapening the cost of debt
than on defense. Even today, with interest
rates close to zero, America s debt subsidies
cost the federal government more than two
per cent of GDP, as much as it spends on all
its policies to help the poor.
This hardly begins to capture the full dam-
age, which is aggravated by the behaviour that
the tax breaks encourage. People borrow more
to buy property than otherwise they would,
raising home prices and encouraging over-
investment in real estate instead of in assets
that create wealth.
The tax benefits are reaped largely by the
rich, worsening inequality. Corporate financial
decisions are motivated by maximising the
tax relief on debt instead of by the needs of
the underlying business.
Debt has many wonderful qualities, allowing
firms to invest and individuals to benefit today
from tomorrow s income. The tax subsidies
have tilted the economy in a woeful direction,
however. They have created a financial system
that is prone to crises and biased against pro-
ductive investment, and they have reduced
economic growth and worsened inequality.
They are a man-made distortion and they
need to be fixed.
Start with the fragility. Economies biased
toward debt are more prone to crises, because
debt imposes a rigid obligation to repay on
vulnerable borrowers, whereas equity is
expressly designed to spread losses onto
Companies without significant equity buffers
are more likely to go broke, and such banks
are more likely to topple. The dotcom crash
in 2000-2002 caused losses to shareholders
worth US$4 trillion and only a mild recession.
Leveraged global banks notched losses of only
US$2 trillion in 2007-2010 and the world
Financial regulators already have gone some
way in redressing the balance from debt by
forcing banks to fund themselves with more
equity. The bias remains, however, in large
part because of the subsidy for debt. Under
a more neutral tax system, companies would
sell more equity and carry less debt. Investors
would have to get used to greater volatility,
but, as equity buffers got thicker, shareholders
would be taking less risk.
A neutral tax system also would lead to
more efficient choices by savers and lenders.
Today 60 per cent of bank lending in rich
countries is for mortgages.
Without a tax break, people would borrow
less to buy houses and banks would lend less
against property. Investment in new ideas and
businesses that enhance productivity would
become relatively more attractive, in turn
boosting economic growth.
Removing the advantages that debt enjoys
also would lead to a fairer system. Relief on
mortgage payments is a subsidy that flows to
people who need it least: Studies show that
the richest 20 per cent of American households
by income gain the most.
Mortgages would become costlier, but new
instruments would emerge to allow individuals
to bridge the gap between current savings and
future income that now is closed by debt alone.
For example, shared-equity mortgages that
divide the gains and losses from home-price
movements between banks and homeowners.
If the arguments for getting rid of the debt
distortion are overwhelming, the path to its
elimination could hardly be rockier. Politicians
do not much like changes that will lower home
prices. There is a big coordination problem:
Taxes are a matter for national governments,
and few countries will be prepared unilaterally
to withdraw subsidies that might make them
less appealing to footloose companies.
In addition, vested interests will bleat loudly.
Businesses that depend heavily on debt, such
as banks, private-equity firms and the like,
will be ready to spend some of the billions
they gain from the tax subsidy on lobbying to
This argues for a staged approach. The place
to start is the subsidies on residential mort-
gages. Not only do these subsidies increase
financial fragility, they fail to achieve their
purported goal of promoting home ownership.
The shares of people owning their own homes
in America and Switzerland, two countries
with vast subsidies, are 65 per cent and 44
per cent respectively, no more than in other
advanced economies, such as Britain and Cana-
da, that offer no tax break. The wisest step
would be to phase out tax relief gradually, as
Britain did in the 1990s.
Getting rid of the tax breaks for corporate
debt will be harder. The few countries that
have tried to level the playing field have done
so by giving an equivalent handout to equity.
Belgium and Italy, for instance, give dividend
payments and profits flowing to equity holders
some of the same perks enjoyed by interest
payments. Such systems are tricky, however,
and lower a country s tax base at a time when
governments need money.
The best approach is gradually to phase out
tax breaks for debt at the same time as lowering
the corporate-tax rate. That would make the
policy revenue-neutral, and also would defuse
the risk to governments who want to push
ahead but fear losing a war waged on tax com-
Acting in concert or alone, countries should
act soon. When interest rates are low, as they
are now, the sweeteners for debt are smaller
and thus easier to remove. When rates rise,
as inevitably they will, the subsidy will become
This is the moment to tackle the great debt
distortion. There may never be a better chance.
@2015 The Economist Newspaper Ltd.
Distributed by the New York Times Syn-
The World Gold Council is out with its
latest report on gold demand. In the
first quarter, demand dropped by 11
tonnes, or one per cent, year-over-year.
"Top-line demand was broadly neutral---down just
11t (one per cent) despite substantial underlying dif-
ferences across geographies and sectors," the report
"Pockets of strength in jewelry were balanced by
weakness elsewhere as demand responded to local
conditions in each market. Higher volumes in India,
the US, and the smaller Southeast Asian markets
were set against declines in China, Turkey, Russia,
and the Middle East."
On Thursday, gold continued its rally after breaking
above the key US$1,200 level on Wednesday.
Gold rose to as high as $1,223 an ounce, its highest
level in three months.
And so with gold demand broadly neutral, this
chart shows which countries are holding the most
gold. Business Insider
are hoarding the
Debt has many wonderful
qualities, allowing firms
to invest and individuals
to benefit today from
tomorrow's income. The
tax subsidies have tilted
the economy in a woeful
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