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The Effect of the 1986 Tax Act On Personal Interest Deductions

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  • James E. Long

    (Auburn University)

Abstract

For most taxpayers who itemize deductions, the 1986 tax act will increase the after-tax cost of interest paid to purchase homes, automobiles, other consumer items, and personal investment assets. Individual tax-return data are used to estimate the elasticity of interest deductions, both home moi tgage and other, with respect to the marginal tax rate and disposable income. Based on these estimates, we show that the lower tax rates and increased standard deductions in the new law can be expected to reduce interest deductions, especially among upper-income taxpayers. The findings suggest that outlays on owner-occupied housing will be more affected by the 1986 tax reform than will other types of expenditures financed with consumer credit.

Suggested Citation

  • James E. Long, 1989. "The Effect of the 1986 Tax Act On Personal Interest Deductions," Public Finance Review, , vol. 17(3), pages 243-263, July.
    • Handle: RePEc:sae:pubfin:v:17:y:1989:i:3:p:243-263
    DOI: 10.1177/109114218901700301
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    References listed on IDEAS

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    1. Bailey, Martin J, 1974. "Progressivity and Investment Yields under U.S. Income Taxation," Journal of Political Economy, University of Chicago Press, vol. 82(6), pages 1157-1175, Nov.-Dec..
    2. Heckman, James, 2013. "Sample selection bias as a specification error," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 31(3), pages 129-137.
    3. Joseph J. Minarik, 1984. "The Effects of Taxation on the Selling of Corporate Stock and the Realization of Capital Gains: Comment," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 99(1), pages 93-110.
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