The Case of the Missing Interest Deductions: Will Tax Reform Increase U.S. Saving Rates?
As of the coming tax year, U.S. taxpayers may no longer deduct personal interest expense when calculating taxable income. Will this change, resulting from the Tax Reform Act of 1986, increase the saving rate in the nation? This paper suggests that the answer is yes: An examination of private saving rates among several OECD countries shows that saving rates are, on average, higher in countries that have not historically subsidized borrowing through interest deducibility. The author also finds that the divergence of U.S. and Canadian saving rates over the past several decades appears to be significantly related to differential tax treatment of interest expense.
Suggested citation: Altig, David. “The Case of the Missing Interest Deductions: Will Tax Reform Increase U.S. Saving Rates?” Federal Reserve Bank of Cleveland, Economic Review, vol. 26, no. 4, pp. 22-34, 12.01.1990.