Tax deductibility of debt subsidizes leveraged buyouts at public expense

Evidence

The U.S. tax code allows interest on debt to be deducted from corporate income when calculating tax liabilities, thus providing an incentive for private equity and other financial firms to use debt financing rather than equity for capital investments. Not only does this amount to a subsidy from taxpayers, but since reduced taxes increase the returns to the financial investors without creating anything for the economy, it is essentially a transfer of wealth from the public to PE firms, another example of taxpayer-financed capitalism. — Andrew deWaard, Derivative Media, 460

Categorization

• DEFINE: Clarifies the mechanism by which debt-financed PE deals get subsidized—the tax code favoring leverage that enables buyout-funded ownership structures.
• XREF: This is the financial-instrument mechanism the reader needs to trace: debt deductibility is the enabler of leveraged buyouts, which produce the private equity ownership of media properties analyzed throughout the book. — connects to: Corporate value is unaffected by debt-versus-equity financing mix in perfect markets — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 175; Tax-adjusted Modigliani-Miller implied postwar corporate debt levels were too low — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 1141; Firm-level accumulation rates depend on macro forces irreducible to individual firms — Yanis Varoufakis, Technofeudalism: What Killed Capitalism, 817