WSJ: Private Equity Defends Business-Debt Deductions

By John D. McKinnon

A private-equity group will release a report on Tuesday that attacks one of the central tenets of many tax-overhaul plans in Washington – the idea of curbing deductibility of business debt.

Limiting debt deductibility could raise the effective tax rate on new investment “and could well stifle growth in the United States, undermining a stated goal of corporate tax reform,” Steve Judge, president of the Private Equity Growth Capital Council, a trade group, says in a statement. “The reality is that debt is an essential part of a typical company’s capital structure. It is used to finance fundamental business activities, like meeting payroll, buying raw materials or making critical capital investments.”

In the case of the private-equity sector, of course, debt is particularly important for a range of investment strategies, including leveraged buyouts. The PEGCC-supported report is one of the opening shots in what is likely to be a fierce battle in the tax-revamp debate.

The notion of reducing the current tax code’s supposed bias in favor of business borrowing – and against stock issuances – already has caught the interest of leaders of both parties, including Sen. Max Baucus (D., Mont.), chairman of the Finance Committee, and Rep. Dave Camp (R., Mich.), chairman of the Ways and Means Committee. It also figured prominently in the Obama administration’s framework for overhauling corporate-tax rules from February.

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