The U.S. Chamber of Commerce has sent a letter to Congress signed by 27 U.S. companies asking for a two-year easing of taxes on debt purchases to be included in economic stimulus legislation.
The letter argues that a temporary suspension of the current "cancellation of indebtedness" rules would help ease the liquidity crisis by allowing companies to use their cash to buy back their debts at a fraction of their face value. Sen. John Ensign, R-Nev. (pictured), has introduced a bill in the Senate, and the U.S. Chamber of Commerce wants a similar provision in the House version of the stimulus bill.
"Under current law, if a company or related party purchases its own debt at a discount, the company is required to pay income tax on the difference between the purchase price and the original issuance price of the debt," said the letter. "The proposal would suspend these rules temporarily to provide an incentive for companies to reduce debt levels in the U.S. economy."
The letter argues that the proposal would allow many companies to restructure their balance sheets and commit more capital to job creation and preservation, rather than servicing their current debt obligations. Financial institutions would also be able to strengthen their balance sheets by selling distressed or discounted debt, the purpose originally envisioned for the Troubled Assets Relief Program, but by using private sector money rather than public funds.
The U.S. Chamber of Commerce has also issued a study by economist Dr. Everett M. Ehrlich, a former Under Secretary of Commerce for Economic Affairs in the Clinton administration, highlighting the stimulative effects of a temporary waiver of business income tax related to the cancellation of indebtedness. The chamber is one of 35 trade associations lobbying Congress to include the waiver in the stimulus package.
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