In theoretical and practical discussion of the income tax treatment of personal expenditures, interest cost on consumer debt has been a persistent
subject of misunderstanding. This article shows the source of the
misunderstanding to be twofold: an erroneous theoretical conclusion that
deduction of consumer interest cost is inconsistent with an ideal definition
of income, and a confusion about the "second best" treatment of interest
cost incurred to purchase durable goods when the tax law already lapses
from the ideal by not inputing rental values. The article suggests that even
for durable goods purchases the continuance of deductibility is probably
best.
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