NEW YORK – Claiming the tax system offers “incentives for destabilizing activities by banks and households,” the code should be changed to reduce the mortgage interest deduction for households and to cut the amount of interest corporations can write-off, Federal Reserve Bank of Minneapolis President Narayana Kocherlakota said Monday.
“Of course, it would be appropriate and important to adjust the timing of these changes in light of prevailing macroeconomic conditions,” he told the Tri-State Bankers Summit in Montana, according to prepared text of his speech, which was released by the Fed.
The “sharp and largely unanticipated fall” in residential land prices caused the financial crisis, he said. “Household and financial institution leverage exacerbate the sensitivity of the financial system to declines in land prices and so reduce financial stability,” Kocherlakota added. And leverage is promoted by the tax system.
“My conclusion is that Congress should modify the U.S. tax system to reduce the incentives for destabilizing activities by banks and households,” he said.
He suggested that if lawmakers are uncomfortable with ramping down on these deductions, they could be replaced by tax credits for downpayments . “Such a tax credit would encourage home ownership without simultaneously providing more incentives for households to accumulate more debt.”
The corporate interest tax deduction can be lowered. “The lower corporate income tax rate would encourage business investment without simultaneously providing incentives for corporations to acquire leverage,” he said.
