Can we hope to abolish debt-related tax incentives?

By Felix Salmon
July 14, 2009

Kevin Drum says that although we should get rid of debt’s tax advantages, we won’t:

We should get rid of it.

(We won’t, of course, any more than we’ll get rid of agricultural payments or road-building subsidies. If you scratch most free market capitalists you’ll find a socialist just below the surface. But we can still dream.)

The weird thing is that this really is within the realm of the possible — the UK, for instance, abolished mortgage-interest tax relief in 2000, a move which had no visible effect whatsoever on either house prices or homeownership, but which did wonders for the exchequer.

As for the business interest tax deduction, why not go the whole hog and replace the corporate income tax with a corporate interest tax? If you structured it to be revenue-neutral, and you phased it in over the course of say five years, then you’d have a huge number of companies trying desperately to pay down their debt and increase their equity — which is exactly what we want. As an added advantage, everybody could stop complaining about the dual taxation of corporate dividends. It might even have bipartisan support!

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Comments
4 comments so far

I thought UK mortgage interest relief was phased out from 1989/90 – wasn’t that what killed the Lawson boom?

It was grandfathered for people who didn’t move house, maybe that was what stopped in 2000.

In any case, although the idea makes sense, the midst of a housing bust might not be the best time to do it?

Posted by jestyn Thirkell-White | Report as abusive

Doesn’t the tax deduction simply make the house more expensive? People on the margins can afford more of a monthly payment and so buy a bigger / more expensive house?

Of course, the banks like it too. Don’t they end up with the money?

Posted by Neal | Report as abusive

Except that if you suddenly divert income streams to debt repayment from consumption, you trigger paradox of thrift armageddon. Krugman would go absolutely mental.

Posted by Dave | Report as abusive

The problem with such tax changes is they only encourage new tax games and in the end what difference does it really make? If you want to raise taxes, there are simpler and more direct means.

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