If you thought Congress’s performance over the failed attempt to repeal Obamacare made Hamlet look decisive by comparison, you’re not alone. Unfortunately, as they now move on to the issue of tax reform, lawmakers in Washington are channeling yet another Shakespearian character, this time the oafish Polonius, whose financial advice to his son boiled down to, “neither a borrower nor lender be.” Clearly, Polonius never had to build a business or meet a payroll.
Borrowing, seen from the lending side of the coin, goes by the name of investment, which of course is the critical ingredient that grows our economy and allows businesses to expand, innovate and hire more people. Yet for some unfathomable reason, Congress now has an idea on the table as part of the current tax reform proposal to limit the deductibility of interest from business debt financing, a magnificently oafish proposal that will discourage exactly the kind of borrowing and investing needed to spur our economy.
Debt financing plays a critical role in the starting up and expansion of a vast majority of U.S. businesses. Without the ability to deduct the cost of interest on debt, most businesses could not afford to borrow the money needed to fund and expand operations without passing significant costs on to consumers, who may not be willing or able to pay the higher cost.
Whether financing the purchase of new equipment, hiring more employees, buying raw materials or building a new plant, the crucial day-to-day functions of U.S. businesses, as well as their plans for future growth, are overwhelmingly possible because of their ability to deduct the interest cost from debt financing.
Indeed, research indicates that 75 percent of new startups rely on debt financing and its accompanying deductibility in order to launch, and 4 out of 5 small businesses require interest deductibility to maintain operations or grow — and these companies account for more than 50 million jobs.
The bottom line is that a proposal to limit the deductibility of interest amounts to nothing more than a massive new tax on the resources sustaining U.S. companies across all industries. While businesses would be the ones stuck paying the tax should this proposal be enacted, ultimately it will be America’s consumers who pay the price.
For example, farmers needing new or updated equipment will either have to go without or take on new debt at a premium. This means consumers face a lose-lose situation: Either fewer goods get to market, or the price of food goes up at the checkout lane. Either way, consumers lose.
Consumers also stand to lose when companies will be forced to make tough choices on budgeting for innovation and modernization if the cost of borrowing money goes up. Utilities, broadband providers and wireless companies, for example, spend heavily on technology infrastructure and research to provide customers better products and more convenient, reliable service. Consumers in rural areas may lose out on access to broadband services of the future if providers cannot afford to fund future projects that expand these services.
If Congress were to limit interest deductibility, innovation would become vastly more expensive, thus guaranteeing that consumers get less of it. Restrictions on modernization further render U.S. companies less competitive globally, which will have a significant negative impact on economic growth.
What is even more concerning for consumers is the impact of limiting the deductibility of interest in certain key sectors of our economy, namely housing and health care. Construction companies have considerable upfront costs that, in almost all cases, require debt financing. Limiting interest deductions will raise costs and keep more Americans from purchasing homes, just as housing is rebounding.
Regarding health care, no industry is more driven by new technology and startups than those working on the miracle cures of tomorrow. The ongoing costs of developing and acquiring new medicines, treatments and devices frequently runs into the hundreds of millions of dollars, very of little of which would ever get off the ground without debt financing. Making borrowing more expensive by limiting the deductibility of interest could be an absolute disaster for both the cost and quality of our healthcare.
Lawmakers in Washington have stated repeatedly that the primary objective of tax reform is to grow our economy and put more money in people’s pockets, but making critical debt financing more expensive will have the same impact on our economy as pulling spark plugs from a car engine. As businesses struggle to adjust, consumers will see our buying power go down in an economy with fewer choices, less innovation and higher costs.
Debt financing is vital for economic growth and our consumer economy. On the issue of limiting the deductibility of interest, for once Congress has an easy decision.
Gerard Scimeca is vice president of Consumer Action for a Strong Economy.
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