Source: Time
Foroohar is an assistant managing editor at TIME and the magazine’s economics columnist. She’s the author of Makers and Takers: The Rise of Finance and the Fall of American Business.
You know something is deeply wrong in our market system when a company likeMicrosoft, which has $100 billion in cash sitting in bank accounts (much of it offshore), decides it needs to borrow billions to fund itsacquisition of the social networking platform LinkedIn.
The deal highlights one crucial way in which our market system is no longer serving the real economy. Why would a cash-rich firm like Microsoft go into debt and cause ratings agency Moody’s to put it on a possible downgrade list? Because it will save around $9 billion in U.S. taxes by doing so. Debt is tax deductible, and borrowing will save Microsoft money relative to bringing overseas cash back home and paying the U.S. corporate tax rate on it.
There are so many dysfunctional things here, it’s hard to know where to begin. As I’ve often written, I find it rich that tech companies in particular try to avoid paying their fare share of U.S. taxes, given that the federal government funded so many of the things that make them wealthy. But an even bigger issue is the way in which our tax system rewards debt over equity. Super-low interest rates make it cheap for companies to borrow. (Low rates are themselves a reaction to the financial crisis, and unlikely to rise much very soon given that the economy is still so weak. Watch this week’s Fed meeting for more.) Then, our tax code makes it easy for firms to write that debt off their tax burden. Jason Furman, the head of the National Economic Council, has estimated that the many ways in which companies can tax advantage of tax-subsidized debt loopholes make corporate debt about 42% cheaper than corporate equity.
Categories: Business, Technology, The Muslim Times