Reihan Salam makes a very important point, that the incentives we’ve put in place have the perverse effect of creating fewer jobs than might otherwise be the case:
As it turns out, the U.S. tax code does give large incumbents an enormous advantage over start-ups by subsidizing corporate debt. When businesses want to raise money for operations, they can pour their profits back into the business, they can sell shares or they can borrow. In an ideal world, we’d want business enterprises to make these decisions on the basis of what makes the most sense based on underlying economic conditions. But in the United States, we allow companies to deduct interest expenses from their taxes but not dividends on their stocks. This makes it far cheaper for companies to raise money by borrowing than by selling shares.
One reason this debt bias is a problem is that it leads companies to take on large amounts of debt, which raises the risk that they will go bankrupt. Yet there is another problem: It is much easier for some companies to borrow than for others. Specifically, well-established firms ‑ for example, large incumbents with pricing power that have been around for years ‑ find it much easier to borrow than new, unproven firms with high-growth potential, which have little choice but to rely on selling shares to finance investment. And so the tax-deductibility of interest expenses and not dividends gives the entrenched corporate Goliaths that have the option to borrow a big boost, while doing nothing for the would-be corporate Davids eager to take them on.
He goes on to propose imposing a cap on the amount of interest a company could deduct for purposes of calculating its corporate income tax. That should be an approach that would be acceptable for those for whom the moral necessity of increasing the amount of revenue derived from the corporate income tax is an article of faith. There is, however, an even simpler, less distorting, and more effective strategy for realigning the incentives that favors more growth and more employment: abolish the corporate income tax completely.