Tax Deductions – A Better Form of Stimulus for the Middle Class

What if tax payers could claim interest payments on debts (other than mortgages) as a deduction? Would it assist in an economic recovery? I would suggest YES. The fundamental reasoning would be two-fold.

• It would allow consumers with debt to be able to more aggressively pay down that debt with the tax savings, which could put them in a position to spend responsibly sooner than they would otherwise be able.
• Doing so would also prompt additional consumer spending

Banks who have proven to be the best lobbyist’s should get behind a move like this. If there were more willingness and ability to borrow, banks will step up. They could charge rates with less public or political back lash. Banks would also likely see an immediate reduction in the sky high default rates they are experiencing now.

Think about it.

This type of policy move could spur spending and thereby job creation. This is what the country’s economy needs to climb out of this recession, not more ZIRP, ineffective onetime tax credits, or short lived sugar rushes from stimulus spending. These things have only proven to cause distortions in market conditions when what we need is stability and a return to some semblance of predictability.

Take this a step further and provide tax deductions for all interest payments on all debts. Interest payment on debt is essentially phantom money that does not really exist in the money supply, unless you count the audible sucking sound it makes. Interest payments are an additional tax on the labor of those who borrow. This type of tax deduction would provide a strong benefit to a struggling middle class.

Other than some pulled forward demand market distortions this may create in the first year it is implemented, what distortions would a policy like this create? The act of using credit to buy a thing is already pulling forward demand as it is.

Would a move like this “screw savers”?

One might argue this is so, but likely only in perception. Savers save, that’s what they do. They are smart enough to look for ways for their money to earn interest, not pay it. Taken in totality, a policy move like this may actually provide more investment opportunity for savers.

The federal tax base would take a hit, sure, but the government has proven it is going to deficit spend no matter what anyway. With the inevitable stimulus plans 2.0 through 9.0, additional backstopping of the states, unemployment extensions etc… being baked into the cake right now, wouldn’t this tax deduction be a better way to let the free market help to sooner find the equilibrium our economy so desperately needs right now?

We have mortgage interest tax deductions as a means to promote home ownership. Given the dire need of consumers and businesses to start participating in an economic turnaround that has solely been fed-by-the-fed to date (the sugar rush is fast wearing off), why not treat all interest on debt the same?

Wouldn’t it be nice if the price of a thing was actually the price of that thing, instead of the price tag plus interest? Sure, that’s exactly what happens when you pay cash, but cash transactions are only part of spending. An economy reliant on credit and fractional reserve money policies is what he have, and have had, for some time now. Unless our country is ready to give up that ghost (it’s not), being able to deduct all interest payments on debt might be a nice little push for a national economy on training wheels in need of finding the balance to ride on its own.

Should a tax deduction on interest payments be temporary? Perhaps only for the next 10 years, while the US is busy emulating Japan’s economy of the PAST 10 years? What am I missing here?