Is U.S. Interest Income Taxed?

• In Event: Procedure, Administration, and Organization

Abstract

Every student of tax law learns that the tax code distinguishes between the treatment of business and personal interest expense. The code allows business taxpayers to deduct interest expense against taxable income but requires interest income to be added to taxable income. By contrast, interest on debt used to finance personal expenses (other than owner-occupied housing) is not deductible, but must be included in the recipient's taxable income. In practice, however, interest income -- on both personal and business debt -- is received tax free. Businesses and households borrow money from lenders, such as foreigners and tax-advantaged or -exempt entities, who do not pay tax on their interest income. This paper estimates the taxable share of U.S. business and household debt, showing that it has declined dramatically over time. These findings have implications for the business tax policy, as well as the tax treatment of debt more generally.

Author

• Hillel Nadler, Wayne State University Law School