Zeev's Turnips Patch-No Politics (ZEEV)

[Zeev Hed]

Ardent, you are assuming that there is a problem of "great impediment on capital formation". The problem is certainly not the "tax law", the problem is "opportunities for such capital formation". Such opportunities are created in the market place in terms of end aggregate demand. The "cost of capital", including the taxation of such capital, at the present is not the impediment. Right now, capital is as cheap as it has been in 60 years. By setting the cost of capital (equity vs debt) on the same foundation (cost in term of dividends on equity and interest on debt), namely taxing it the same way, you create a much better corporate balance sheet. The current state of affairs encourages weak balance sheets with excess debt, because the interest on debt is tax deductible while dividends paid to equity holders is not (to corporations). I agree with you that dividends and capital gains should be taxed at the same rates as interest received on debt instruments are (except that cap gains may need to have an inflation adjustment, thus the special treatment of LT or extra LT gains, may be valid), but if that is the case for recipients of such "income on capital", then the cost of capital (interest and dividends) should be treated the same way as well (both need to be deductible as "cost of capital").

If you go that route, the debt equity ratio n average will be reduced resulting in much more robust corporate balance sheets n general.