Summary:Risks to macroeconomic stability posed by excessive private leverage are significantly amplified by tax distortions. ‘Debt bias’ (tax provisions favoring finance by debt rather than equity) is now widely recognized as posing a stability risk.
Household debt bias from mortgage interest deductions is a long-standing concern, while other housing-related taxes have come to be more purposively used for stability purposes. This includes the use of transactions taxes to reduce the risk of erratic house-price developments—which have had mixed success. New evidence finds that recurrent property taxes curb house-price volatility, adding to their attraction as a fair and efficient revenue source.
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