An Alternative Way to Treat Interest Properly in Tax Reform

Neutrality holds that tax policy should not influence the economic decisions of individuals or businesses in either a positive or negative way. The federal tax code currently taxes most forms of interest income and provides a deduction to borrowers. When interest income is taxable, this maintains neutrality. Alternatively, the tax reform can achieve neutrality by exempting the interest income of lenders and not allowing borrowers to deduct their interest cost. This is an equally acceptable method for arriving at the neutral tax treatment of interest.

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