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Replace Interest Deduction for Debt with New Deductions for Capital Spending

US Republicans are continuing to take a hatchet to the US economic and political institutions. The end result, at this point, is anybody's guess. Is there a method in this madness? Maybe.

The latest swing seeks to change the US tax code and the foundations of modern finance. As it currently stands the US financial system is more oriented toward debt than equity financing. The tax code makes it cheaper to finance with debt than with equity.

According to the Republican plan, eliminating this tax deduction would lead to $1.5 trillion in revenue for the government over the next 10 years. The Republicans would then call for immediate deductions for capital spending. Capital spending deductions would change the calculus between debt and equity financing, making equity financing cheaper. This would increase the incentive for US businesses to invest in US companies and innovation.

According to Ed Yardeni, these changes could "pose a threat to debt-financed buybacks as a driver of the bull market."

Other possible affects of the proposed tax change:

In addition, a study by the Bureau of Labor Statistics, the Bureau of Economic Affairs, the Federal Reserve and Ernst & Young indicate that just a 25% limitation on the deductibility of interest expense would reduce state of Texas Gross domestic product by $2.88 billion and compensation for Texas workers by $370 million.
30 agricultural groups are expressing concerns about the proposal to eliminate the deduction of interest expenses that is part of Republican tax reform.

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