What if We Taxed Debt?

The United States encourages families and companies to take on debt. Want a really big house, Mr. Family Man? You get a tax benefit from that humongous mortgage. Want to finance a new expansion by borrowing, Mr. CEO? The interest you pay is tax-free.

But what if we did the opposite. What if we taxed debt? Interesting thought, via WSJ:

In a new paper, Olivier Jeanne of Johns Hopkins University and Anton Korinek of the University of Maryland build a model designed to determine what kind of tax would best smooth out the credit booms and busts that can cause so much economic damage.

The result: We could all be better off if, during booms, the government placed a tax of 0.56% on the borrowings of small and medium-sized businesses, and 0.48% on the borrowings of U.S. households. The tax would fall to zero in busts.

The typical American entered the recession with debt worth 122 percent of his yearly income. We'd like to see that number come down in the future. How do we do it? One way is to discourage families from taking on too much debt by taxing their debt. Another way that wouldn't discourage investment is to simply tax what they spend with a national consumption tax that crept up during booms and fell, to encourage buyers, when the economy slowed down.

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Derek Thompson is a senior editor at The Atlantic, where he writes about economics, labor markets, and the entertainment business.

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