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** My note –

This explains why and how we got here in the structurally deficient, systemically corrupted economic crisis of 2008, 2009 and onward. It started here in these changes from the 1980’s that were made.

Several changes made immediately prior to 1980 also contributed to the degradation of structural integrity in tangible corporate assets – they became over-leveraged and depleted from that point continuing to this day.

– cricketdiane


Debt, Taxes, and Corporate Restructuring
By John B. Shoven, Joel Waldfogel
Contributor Joel Waldfogel
Edition: illustrated
Published by Brookings Institution Press, 1990
ISBN 081577883X, 9780815778837
210 pages

See page 34 Chart and explanation in paragraphs below it into page 35 –

Figure 4: Debt-to-Asset Ratios, Selected Years, 1948 – 1988
Sources: Author’s calculations based on Board of Governors of the Federal Reserve System, “Balance Sheets for the U.S. economy, 1946 – 85,” Statistical Release C.9 (October 1986) and “Balance Sheets for the U.S. economy, 1949 – 88,” Statistical Release C.9 (April 1989).

**my note –
this bar chart is great and overviews a very clear visual explanation of debt ratio comparisons.
(It can be found on the link immediately below.)

“A Less Straightforward Story – Unlike the pattern in the period preceding the 1980’s, the growth in both debt and loanable funds in 1981 – 88 needs a more complex explanation. This period is dominated by three factors: a complete turnaround in fiscal policy, as measured by changes in federal debt relative to GNP; the deregulation of financial markets; and the increasing sophistication of financial markets in taking advantage of both financial and tax arbitrage opportunities, as reflected in the great tax shelter boom that lasted until 1986.

With higher real interest rates and deregulation of financial institutions, the total demand for interest-bearing assets increased, and reallocations of portfolios created a much larger supply of funds to be borrowed.
All sectors share in these changed opportunities by increasing both their borrowing and their lending (right bars in Figure 3). The noncorporate business sector continued to dominate the corporate sector in terms of rates of increase in borrowing, especially when measured relative to assets (Figure 4). Net lending, however, clearly came from the most tax-advantaged sectors: foreign and pension and life insurance companies (Figure 2). Corporations began to increase their debt relative to assets during this period, but at about the same rate as other sectors. For the postwar period as a whole, however, corporations maintained growth rates in debt-to-asset ratios well behind those of the individual sector.” pp. 34-35

“If risk were to be measured by increases in debt relative to assets, concern could well turn to the noncorporate business sector. This sector has experienced the greatest increase in leverage in the postwar era, with debt rising from 6 percent of assets in 1948 to 38 percent by 1988. The recent failure of many savings and loan institutions is a warning that lending to the individual sector can easily be as risky as lending to the corporate sector.” – pp. 33 -34



Also see page 175 for its explanation of the basis of our current situation which has its major roots in the 1980’s changes made by US –

“the 1981 tax act began to move incentives toward increased corporate borrowing, although this effect was mitigated by the reduction in capital gains tax rates and high interest rates.”

[ . . . ]

“. . . important nontax were also influencing corporate financing decisions during the early 1980’s. In particular, mature corporations were discovering that it was efficient, from the standpoint of corporate control, to restructure by buying back equity with the proceeds of debt issues, thereby committing themselves to distribute “free cash flows” to investors through bond interest and principle repayments.”2

2 Michael C. Jensen, “Agency Costs of Free Cash Flow: Corporate Finance and Takeovers,” American Economic Review, Volume 76, (May 1986, Papers and Proceedings, 1985), pp. 323-30

“Moreover, increased reliance on strip financing (in which institutional investors acquire combinations of junior debt and equity or senior debt, to reduce conflicts of interest among classes of investors) and the rise of active bondholders enabled more debt to be issued without the fear of incurring excessive dead weight restructuring and bankruptcy costs if the corporation defaulted on its commitments to creditors.”3

3 Michael C. Jensen, “Capital Markets, Organizational Innovation, and Restructuring,”working paper, Harvard Business School, Division of Research, 1989.

And the whole of page 176 –

(Which all applies to the current economic crisis, credit default swaps and derivatives markets created as an outgrowth of this and the methods utilized from the 1980’s onward for conniving around tax laws.

“Corporate restructuring took a decided turn in 1984. Net new borrowing by corporations exploded to nearly $160 billion a year during 1984 – 86 from $66 billion a year from 1978 – 83. At the same time there was a quantum leap in the magnitude of both share repurchases ($37 billion a year in 1984-86 versus $5 billion a year in 1978 – 83) and other equity retirements through corporate acquisitions ($75 billion a year in 1984-86 versus $15 billion a year in 1980 – 83.)4

The 1986 Tax Reform Act had an even more dramatic effect on the tilt toward corporate debt financing. Personal tax rates were reduced to a level well below that of corporations (28 percent for wealthy individuals versus 34 percent for corporations by 1988), and capital gains tax rates were greatly increased. That, in conjunction with relatively low interest rates, greatly reduces the implicit tax on shares and makes equity financing a particularly expensive way to finance corporate investment.

That debt financing has become more tax favored with the 1981 and 1986 tax acts is closely to the fact that noncorporate forms of organization have become more tax favored relative to the corporate form. If all corporate earnings before interest and taxes could be distributed to investors as interest, the corporations would essentially be converted to a partnership for tax purposes. No entity-level tax would be imposed on the corporation,5 and all owners would pay tax at the personal level on interest income. It would be as if the shareholders owned income bonds.

There are many ways in which the firm can “lever up.” One method that has received considerable attention is leveraged buyouts, or LBOs. Others include debt-for-equity swaps, dividend-for-debt exchanges, cash redemption of stock financed with debt, deferred compensation plans, partnership arrangements involving deferred payments, and leveraged employee stock ownership plans (ESOPs). An important tax issue that arises in leveraged buyouts and other debt-increasing recapitalizations is whether the Internal Revenue Service (IRS) will claim that the debt issue is really equity in disguise.6 As we show, all these alternatives are limited in their ability to eliminate the corporate level tax.” – pp. 176

Also – check this –
from pp. 176
4 Joint Committee on Taxation, Federal Income Tax Aspects of Corporate Financial Structures, Joint Committee Print, 101 Cong. 1 sess. (Government Printing Office, January 1989), tables I-A, I-B, pp. 8-9. The 1984 Deficit Reduction Act also eliminated with-holding taxes on newly issued bonds and other evidences of indebtedness that generate portfolio interest income to foreign investors. Bonds purchased by foreigners skyrocketed from less than half a billion dollars per quarter over the preceding decade to more than 10 billion dollars per quarter over the next three years. Board of Governors of the Federal Reserve System, “Flow of Funds Accounts: Fourth Quarter 1988,” Statistical Release Z.1 (March 1989).



Contents –

Introduction and Summary
corporate tax, high-yield debt, free cash flow

Federal Policy and the Accumulation of Private Debt
corporate sector, marginal tax rates, corporate debt

Corporate Leverage and Leveraged Buyouts in the Eighties
free cash flow, Leveraged Buyouts, pecking order theory

Debt Equity and the Taxation of Corporate Cash Flows
leveraged buyouts, share repurchases, capital gains tax

Distinguishing Debt from Equity in the Junk Bond Era
high-yield debt, preferred stock, Drexel Burnham Lambert

Converting Corporations to Partnerships through Leverage
economic rents, ESOPs, double taxation

Contributors –

Alan J Auerbach
U.S. tax system, dividend relief, mergers and acquisitions

Bulow Lawrence H Summers and Victoria P Summers
Drexel Burnham Lambert, RJR Nabisco, high-yield bonds

Myron S Scholes and Mark A Wolfson
ESOPs, excess return, alternative minimum tax

Figures –

Bulow Lawrence H Summers and Victoria P Summers
Cost of Capital, net-present-value

The boom in corporate restructuring, accompanied by large increases in debt finance, was one of the most important developments in the U.S. economy in the 1980s. Financial and tax specialists analyze how the U.S. tax system-especially in its bias toward debt financing-has affected corporate financial decisions and influenced the recent wave of corporate restructuring. The authors evaluate the hypothesis that the rise in the cost of capital during the 1980s helped stimulate the surge in corporate takeovers. They analyze the effect that changes in tax laws and in the volume of government debt have had on corporate financial decisions. The authors examine how recent financial innovations have blurred the distinction between debt and equity finance.

More details
Debt, Taxes, and Corporate Restructuring
By John B. Shoven, Joel Waldfogel
Contributor Joel Waldfogel
Edition: illustrated
Published by Brookings Institution Press, 1990
ISBN 081577883X, 9780815778837
210 pages





The Administration proposed increases of 19 percent for the Security and Exchange Commision and 8 percent for the Commodities Futures Trading Commission ”to permit these agencies to keep pace with major changes in these markets and corresponding increased workloads.” The S.E.C. budget would rise to $160.9 million from about $135 million this year; the commodities agency budget is $35.5 million, up from $32.8 million. In the wake of the October stock market collapse, the S.E.C. budget shifts that agency’s focus from insider trading to increased oversight of the securities markets.

A proposed $1.2 billion reduction in funds for Medicare, health insurance for the elderly and the disabled, from the level agreed to by the White House and Congress last November led Representative Edward B. Roybal, a California Democrat who is chairman of the Select Committee on Aging, to charge the Administration with ”breach of faith.”

The Justice Department is seeking a 14 percent increase, to $6.2 billion, with much of the extra money for enforcing drug laws and building prisons. Expenditures on drug cases would rise by $76 million, including the creation of 655 jobs.

At the same time, the department would eliminate $69.5 million in grants for state and local programs aimed at drug abuse. Arnold Burns, the Deputy Attorney General, said state and local governments would not suffer because new efforts to share millions of dollars in assets of narcotics traffickers ”would more than make up” for the lost money.

To alleviate overcrowding in Federal prisons, nearly $420 million would go for prison construction, expansion and repairs. The projects would add room for 5,400 new prisoners, including 4,000 at four new prisons and two new detention centers.

How Major Government Programs Would Be Affected by Reagan’s Budget

Published: February 19, 1988



$2.95 – Philadelphia Inquirer – NewsBank – Feb 21, 1988
The 1981 act also slashed corporate taxes. By 1983, corporations paid only about one-quarter the … tax dollar, 42 cents is spent on entitlement programs. …



G.O.P. to Seek Cut in Capital Gains Tax

Published: July 8, 1999

House Republicans said today that they would seek to cut the top tax rate on long-term capital gains to 15 percent from 20 percent as part of the big tax-cutting bill they will take up next week

If enacted, the cut in the capital gains tax rate, which applies to profits on the sale of stock and other assets held for more than a year, would give a break to the growing legions of individual investors.

Representative Bill Archer, the Texas Republican who is the chairman of the House Ways and Means Committee, said the capital gains tax cut would help keep the economy growing by stimulating additional savings and investment.

The capital gains tax reduction would account for about $50 billion of the tax cut over a decade, Congressional aides said.

The top capital gains rate was last cut, to 20 percent from 28 percent, as part of the 1997 bipartisan tax and budget deal. Last year, Mr. Clinton signed legislation that reduced to one year from 18 months the period that stocks or other assets had to be held to qualify for the long-term rate.

The Administration attacked the plan today, partly on the ground that it favors the wealthy, who own the vast majority of stocks and bonds.

Mr. Archer’s capital gains proposal will be one element of an $864 billion, 10-year tax-cutting plan that his committee is scheduled to vote on next week as the Republican-controlled Congress begins a politically charged showdown with Mr. Clinton over how to allocate trillions of dollars in projected Federal budget surpluses.