Can we hope to abolish debt-related tax incentives?
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!