Government action to reverse a ‘senseless’ tax shield subsidy that promotes debt would benefit entrepreneurs – and society as a whole, according to Professor Terence Tse from ESCP Europe Business School in London.

Government action to reverse a ‘senseless’ tax shield subsidy that promotes debt would benefit entrepreneurs – and society as a whole, according to Professor Terence Tse from ESCP Europe Business School in London. In a paper co-authored with Mark Esposito from Harvard University’s Division of Continuing Education, Professor Tse says that governments should act now to reverse the favourable tax treatment given to debt-laden companies – especially banks.

Under current rules, businesses pay lenders before taxes, and shareholders last. This not only discourages shareholding, but also cheapens borrowing. Tse states, “Governments are currently giving tax benefits to companies for borrowing, effectively encouraging them to pile up debt.” The authors say that flipping this particular area of tax so that investors are more inclined to buy into companies will mean business is less reliant on traditional bank financing and debt. This action alone would improve banks’ ability to absorb losses, ease the burden on the taxpayer in future economic downturns, help to encourage entrepreneurship and, in doing so, improve job prospects for the young.

Tse adds, “EU governments urgently need to recalibrate the economy for entrepreneurs. Europe’s preference for debt over shares is doing its economy a great disservice by not creating the right dynamics for new business creation. By maintaining the current promotion of debt capital, as opposed to risk capital, it is unlikely that European start-up hubs will be able to grow sufficiently to improve economic conditions and living standards.”

“Research has shown that one job created in high-tech leads, in the long run, to the creation of four more jobs in the same region. And high-tech workers are paid between 17-27 percent more than those in other fields, so it makes sense to get more money into the hands of entrepreneurs and SMEs directly from investors. The current obsession with bank financing means banks will continue to monopolise access to capital and rely on the taxpayer in the event of a downturn.”