How to bring interest rates down
It has been pretty much conceded by almost everyone both in and out of government that we will not have a lasting economic recovery unless interest rates come down and stay down.Skip to next paragraph
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However, it seems obvious to this writer that this will never happen until our tax laws are changed, because our present tax laws create a perpetual upward pressure on interest rates.
Our present income tax laws generally discourage people from saving money to loan at interest by taxing such income. At the same time these laws encourage people to borrow money which they don't have to buy things which they don't need by allowing them to deduct from their taxable income almost all interest which they pay out.
This combination obviously results more in a demand for money to borrow than it results in a supply of money to loan when interest rates are low. So long as this situation exists, the law of supply and demand will tend to keep interest rates high.
If Congress would change the tax laws to make all interest income free from the income tax and to make all interest paid out nondeductible for income tax purposes, it would result in a perpetual downward pressure on interest rates. This is because there would be a lot more people wanting to loan money out to get this tax-free income.
At the same time there would be far fewer people wanting to borrow money unnecessarily because they couldn't take a tax deduction for the interest which they paid out. Thus the law of supply and demand would tend to keep interest rates low.
There are those who would argue that it would be unfair not to allow such a tax deduction for interest paid out and unfair not to make people pay income tax on their interest income.
However, in most cases, the additional tax that a borrower would have to pay as the result of this change would be more than compensated for by the reduction in interest he would have to pay because of the resulting decrease in interest rates.
So far as the person loaning money is concerned, his income would probably be reduced by a greater amount in most cases, owing to the lower interest rates, than he is now paying in income tax on his present greater amount of interest income. So he would not likely get any significant windfall as a result of such a change.
Of course the above contention is only conjecture. However, such a change ought to be worth a try because it could always be changed back to the way it now is if it did not turn out to be an improvement.