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1 Alan Cole, Interest Deductibility - Issues and Reforms 1 (2017)

handle is hein.taxfoundation/intdeusf0001 and id is 1 raw text is: FISCAL FACT No. 548 May 2017 Interest Deductibility - Issues and Reforms Alan Cole Economist Key Findings: The Tax Foundation is the nation's leading independent tax policy research organization. Since 1937, our research, analysis, and experts have informed smarter tax policy at the federal, state, and local levels. We are a 501(c)(3) non profit organization. ©2017 Tax Foundation Distributed under Creative Commons CC BY NC 4.0 Editor, Rachel Shuster Designer, Dan Carvajal Tax Foundation 1325 G Street, NW, Suite 950 Washington, DC 20005 202.464.6200 taxfoundation.org Overall, the U.S. federal income tax system is intended to include deductions for interest paid and taxation on interest received. However, a substantial portion of interest received is untaxed. The combination of deductions for interest paid and untaxed interest income results in a substantial gap in the income tax, amounting to as much as 33 percent of all corporate debt. Interest deductibility is also a key feature of many profit-shifting arrangements, where multinational corporations borrow in order to reduce U.S. taxable income against the high U.S. corporate income tax rate. The net subsidy for leverage created by interest deductibility may contribute to financial crises because unexpected defaults on debts often lead to a macroeconomic cascade of troubled financial assets. Several reforms have sought to limit interest deductibility in recent years, and these reforms should be taken seriously. Tax provisions should be evaluated on the basis of opportunity cost; limiting interest deductibility is a better idea to raise revenue than many other options.