Jun
03

Deductible Instability

Because interest to bondholders is tax deductible, while dividend payments to shareholders are not, lowering the corporate tax rate will reduce the incentive of all corporations including banks to raise capital by issuing debt. Assuming the top corporate tax rate falls from 35% to 25%,that would result in banks increasing their reliance on equity by about 1% or $10 billion and in the process make banks slightly more stable.

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