Did bad tax policy help cause the economic meltdown? Former assistant Treasury Secretary for Tax Policy Pam Olson thinks so.

Speaking at a Dec. 5 tax reform conference sponsored by TPC and Tax Analysts, Pam fingered what she called an “anti-equity and pro-leverage” Internal Revenue Code as one culprit in the collapsing credit markets. TPC’s Bill Gale agrees--after a fashion--although other tax experts are unconvinced.

Her argument: Because corporate income is double-taxed, the easiest way for companies to avoid that levy has been to borrow. Since interest is deductible while dividends are taxed at 15 percent, companies had an enormous temptation to take on more debt.

There isn’t any doubt about the disease. By any measure, corporate debt has soared to unprecedented levels in recent years. It was $10 trillion at the end of 2007. The use of credit market instruments increased nearly 10-fold from 2003 to 2007. Overall non-financial business debt/equity ratios topped 60 percent last year. This year, it is anyone’s guess.

The problem with Pam’s theory is that much over-leveraging happened at a time when dividend taxes were relatively low. The worst of the credit bubble occurred after dividends and capital gains rates were slashed in 2001.

That’s not to say the tax code was entirely innocent. Debt does remain tax-favored and no doubt that encouraged some foolish borrowing. But there was much more going on, including the lack of transparency and regulation, the ability of companies to move debt off their balance sheets, low interest rates, the temptations of leveraged investment in an era of booming asset values, and the explicit link between executive comp and stock prices.

It is also worth remembering that the root of today’s recession was the collapse of financial institutions that were grossly overinvested in subprime mortgages and their derivatives. The sort of non-financial, Main Street business that Pam is worried about were more victims than causes. Not entirely innocent, for sure, but victims nonetheless.

Still, as Bill Gale argues, the very high debt loads that many companies carried into the slowdown made them especially vulnerable. Now, stuck with big interest payments, and unable to raise new cash with both debt and equity markets effectively closed to them, these businesses have little choice but to cut costs by slashing their workforce. Just ask Sam Zell, who is putting the Tribune Company into bankruptcy to avoid defaulting on his debt.

No doubt, too much leverage is making today’s recession worse. The question on the table is: How much is the tax code to blame?