Debt and Taxes

A proposal to reduce the U.S. corporate tax rate from 35 percent to 20 percent also includes a provision to limit the tax deductibility of interest expense. Corporations have responded in a dramatic fashion to this proposal by repurchasing $178.5 billion worth of bonds through early October of this year. In contrast, companies repurchased only $87.3 billion of bonds for the same period last year. Of course the potential increase in interest rates could also be driving debt repurchases as companies look to lock in low coupon rates. For example, Wal-Mart issued $6 billion in new bonds to help finance an $8.5 billion repurchase. Both causes have driven debt repurchases to astounding levels.