DEZERNAT ZUKUNFT

The Corona-induced market sell-off in March 2020 reinforced an old lesson: high leverage, and in particular high debt-to-equity ratios, makes for brittle balance sheets. This had become clear in 2008, too, but post-crisis deleveraging measures concentrated on banks, leaving corporate leverage to increase over the last decade.

To increase economy-wide financial resilience, not just banks but all economic agents could be directed towards deleveraging after Corona. Specific measures in this direction include ending the preferential tax treatment of debt over equity and a roll-out of macroprudential regulatory measures to all marketable debt-issuing entities. In practice, this means corporate income taxes would tax profits without deductions of interest and royalties; and maximum leverage ratios and minimum liquidity measures would be set and enforced by the European Securities and Markets Authority. A direct tax on leverage could also be considered, but would require careful elaboration.

By reducing private-sector credit creation, this proposal would reduce aggregate demand. It therefore links closely to proposals like Universal Basic Services or the creation of a European Investment Authority that could inject the otherwise missing demand. Moreover, since the fall in private credit creation would increase the space for non-inflationary monetary creation elsewhere, this proposal could act as a non-tax financing measure for other proposals.