The Debt-Equity Distinction: A Century of Policy by Accident

Research

12 Pages

Daniel Peris argues that America’s bias toward debt financing is largely a century-old tax-policy accident rather than an economic necessity. Corporate interest deductions now subsidize leverage across private equity, buybacks, M&A, and data centers, costing the Treasury at least $100 billion annually while favoring debt over equity.

Key Takeaways

Wartime rule endured: Congress removed limits on corporate interest deductions in 1918; the wartime excess-profits tax disappeared in 1921, but the deduction remained.
Debt subsidy scales: The Treasury forgoes at least $100 billion annually from the tax shield on roughly $14 trillion of nonfinancial corporate debt.
Financial engineering scales: Up to $2.5 trillion in PE debt and $1 trillion annual buybacks show tax-favored leverage embedded across corporate finance.

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