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Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050

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Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050
Textbook Problem

The Tax Reform Act of 1986 eliminated the deductibility of interest payments on consumer debt (mostly credit cards and auto loans) but maintained the deductibility of interest payments on mortgages and home equity loans. What do you think happened to the relative amounts of borrowing through consumer debt and home equity debt?

To determine
The effect of the tax reform of 1986 on the amount of borrowing through consumer debt and home equity debt.

Explanation

The tax reform act of 1986 was implemented in order to reduce the consumer debt and to increase home equity debt. As a result, people started to pay their mortgage less quickly and financed the general spending through home equity.

Concept

Concept introduction:

Tax: It is the unilateral payment made by the public towards the government. There are many different types of taxes in the economy; they include income tax, property tax, professional tax, and so forth.

Tax reform of 1986: This reform eliminated the deductibility of interest payments on consumer debt but maintained the deductibility of interest payments on mortgages and home equity loans.

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