Greenspan Backs Tax Changes to Deter Buyouts by Borrowing

Federal Reserve Chairman Alan Greenspan, voicing concern about the build-up of corporate debt, threw his weight today behind proposals to deter buyouts financed with massive borrowings by changing the tax laws on stock dividends.

The tax code favors borrowing because companies receive a tax deduction for interest payments they make but not for dividends they pay to shareholders, a point also emphasized earlier in the week by Treasury Secretary Nicholas F. Brady and Securities and Exchange Commission Chairman David Ruder. By changing the law, a company might be more likely to float stock in order to finance a takeover.

“The degree of corporate leveraging is especially disturbing in that it is being subsidized by our tax structure,” Greenspan told the Senate Finance Committee during the panel’s third day of hearings on takeovers and buyouts.

But the Fed chairman, neatly summarizing the dilemma facing legislators and the Bush Administration, added: “Our options for dealing with this distortion are, unfortunately, constrained severely by the federal government’s still serious budget deficit problems.”

Greenspan estimated that taxing dividends brings in $20 billion to $25 billion to the Treasury each year.

The Fed chairman said evidence suggests that the wave of restructurings in this decade, which culminated in the recent $25-billion buyout of RJR Nabisco Inc., is probably making the American economy more efficient.

But in the process firms have taken on a mountain of debt, meaning they are more likely to run into trouble in the event of a severe economic downturn.

As the nation’s leading bank regulator, Greenspan said he was particularly concerned by the growing volume of bank lending to finance leveraged buyouts.

He said the Fed was reviewing its guidelines for assessing the riskiness of these loans.