Biggest questions Republicans have to answer on tax reform

Will Republicans crack down on banks?
2016 DealBook Conference
Another intriguing element of the Ryan-Brady tax blueprint is that it would eliminate the deductibility of interest expenses from corporate income tax. Corporate America in general will miss that provision, but most companies would be compensated by another rule change that allows them to immediately deduct the full value of business investments from their income rather than depreciating them over several years.

A big exception to this rule is the financial sector, which is overwhelmingly fueled by debt and which generally invests in financial instruments rather than tangible physical capital.

The tendency to engage in debt-financed speculation is an important source of fragility in the banking system, and in the wake of the financial crisis regulators have done a lot to require banks to borrow less. Removing the tax deductibility of debt would be another lever for discouraging risky bank behavior, and could have considerable benefits for financial stability.

But Trump’s top economic policy adviser, Gary Cohn, feels that a big problem with the contemporary United States is that banks aren’t allowed to engage in enough risky borrowing.

“Banks are forced to hoard money,” he told Fox Business in February, “because they are forced to hoard capital.”

This is not really how bank capital works, but Donald Trump says his friends have told him they can’t get loans because of these rules, so he seems to agree with Cohn. Cohn, not coincidentally, was the No. 2 guy at Goldman Sachs before going to work at the Trump administration. And indeed, a huge share of the Trump administration’s economic team — including basically all of the political appointees at Treasury and even Bannon, who is supposed to be leading the populist wing — are veterans of the banking sector. Beyond the big global banks, private equity firms that specialize in leveraged buyouts are also worried about this idea.

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