Narayana Kocherlakota, president of the Federal Reserve Bank in Minneapolis, recently suggested a change in the U.S. tax system to discourage debt growth. High consumer and bank debt lowers the stability of the economy. This makes economic trouble, like what occurred in 2007 through 2009, more likely.
Currently, the tax code encourages debt by allowing taxpayers to take advantage of interest deductions. Consumers are encouraged to incur mortgage debt and banks are encouraged to take on debt for financing. Kocherlakota urged Congress to reduce the deduction for mortgage interest and reduce the interest deduction for corporations. This would reduce the incentives for people to take on debt that destabilizes the economy.
Officials are attempting to avoid another economic downturn. President Obama signed a bill last year that gives the Federal Reserve the power to supervise financial institutions whose failure could cause an economic crisis.
Vivien Lou Chen, Fed’s Kocherlakota Calls for Tax-system Changes to Discourage Debt
Growth, https://www.bloomberg.com/news/2011-06-27/fed-s-kocherlakota-calls-for-tax-systemchanges-to-discourage-debt-growth.html (accessed June 28, 2011).