# Debt and equity should be equally taxed In most countries, companies can deduct interest payments from their taxes. It is therefore more interesting for them to borrow rather than to fund themselves through equity. However, this causes them to become more indebted than expected, weakening economic resilience in times of crisis. One solution would be to withdraw deductibility and lower the tax on gross profits so that the total tax stays the same but does not favour debt. For instance, for a company with $50bn in gross profits but $40bn in interest payments, a 7% tax rate on gross profits would yield as much to the state as a 35% tax rate on net profits. However, lowering taxes does not sell well, politically speaking. Another solution would be to make issuing equity more attractive, by making some share of a bank's equity that is above its regulatory requirements as tax-friendly as debt. Italy implemented such a scheme, called allowance for corporate equity (ACE), and successfully reduced its tax bias in favour of debt to less than 1%. --- ## 📚 References - [“Why the Bias for Debt over Equity Is Hard to Dislodge.”](https://www.economist.com/finance-and-economics/2022/01/22/why-the-bias-for-debt-over-equity-is-hard-to-dislodge) The Economist, Jan. 2022.