OP-ed in today's Wall Street Journal:  Deleveraging Can Save Jobs; A Simple Change in Tax Policy Would Make It Easier for Companies to Retire Debt, by James Barth, Michael Klowden & Glenn Yago (all of the Milken Institute):

What's needed is prompt, decisive action to restore transactional trust among institutions, increase liquidity, expand credit, and build consumer confidence. It's especially important that small and medium-sized businesses — the source of virtually all job growth — regain access to affordable credit so they can make capital purchases, restock their inventories, pay their suppliers, and hold on to their employees.

Legislative and regulatory actions to date have begun the process, albeit at a staggering cost. Yet more action is needed, especially in tax policy, to encourage deleveraging.

One part of the solution to the current crisis is for Congress and the Treasury to restore, temporarily, the option for companies to deleverage by retiring debt at a discount without incurring tax liability. Tax-code and regulatory changes in the 1980s limited this option by treating the difference between the original issue price of debt and the lower amount for which it's repurchased as taxable income. The resulting tax liability on this "phantom income" decreases liquidity and blocks necessary restructuring of distressed corporate balance sheets. It also creates a perverse preference for bankruptcy that destroys asset values, jobs and customer relations. Finally, it puts American companies at a disadvantage relative to their competitors in nations with more accommodating tax structures, such as Germany and France.

We believe American enterprises should be encouraged to deleverage, whether by exchanging newly issued or existing stock for debt, or using cash from asset sales. This is the worst possible time to impose a tax liability on companies trying to avoid layoffs by reducing their interest payments on debt. Freed from a tax on phantom income, thousands of companies will become stronger through deleveraging.

As companies pay down debt, the yield premiums on their remaining debt will decline, and investors will tend to focus on the higher potential returns from equity. Mindful of fiscal pressures, we suggest that the suspension of the tax on this repurchased debt expire after a reasonable period, perhaps two years. Too many financial institutions and industrial companies are struggling under the wrong capital structure. It's time to encourage them to pay off their debt.