![]() ![]() But the bias remains-in large part because of the subsidy for debt. Financial regulators have already gone some way to redressing the balance from debt by forcing the banks to fund themselves with more equity. Leveraged global banks notched up losses of $2 trillion in 2007-10 and the world economy imploded. The dotcom crash in 2000-02 caused losses to shareholders worth $4 trillion and a mild recession. Firms without significant equity buffers are more likely to go broke, banks more likely to topple (see Free Exchange). Economies biased towards 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 investors. They are a man-made distortion and they need to be fixed. They have created a financial system that is prone to crises and biased against productive investment they have reduced economic growth and worsened inequality. But the tax subsidies have tilted the economy in a woeful direction. Corporate financial decisions are motivated by maximising the tax relief on debt instead of the needs of the underlying business.ĭebt has many wonderful qualities-allowing firms to invest and individuals to benefit today from tomorrow’s income. The tax benefits are largely reaped by the rich, worsening inequality. People borrow more to buy property than they otherwise would, raising house prices and encouraging over-investment in real estate instead of in assets that create wealth. This hardly begins to capture the full damage, which is aggravated by the behaviour the tax breaks encourage. Even today, with interest rates close to zero, America’s debt subsidies cost the federal government over 2% of GDP-as much as it spends on all its policies to help the poor. That means governments on both sides of the Atlantic were spending more on cheapening the cost of debt than on defence. 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 3% of GDP-or $510 billion-and in America almost 5% of GDP-or $725 billion (see Briefing). It sounds prosaic, but the cost-and the harm-is immense. 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 is the subsidy that governments give to debt. ![]() By contrast, a vast distortion in the world economy is wholly man-made. ![]() THE way that black holes bend light’s path through space cannot be smoothed out by human ingenuity. ![]()
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