How would Sensible Tax Reform affect interest rates?
Interest is the rental rate that is charged for renting money. Interest rates are a composite of many different factors, including inflation, federal monetary policy and default risk. Another important factor is the income and payroll taxes that lenders, both commercial and individual, must pay. Like any other service provider, lenders cover their costs by embedding them in the prices they charge. If lenders do not need to pay income and S/S taxes, interest rates will fall. Under our present system, the interest paid by municipal governments (e.g., cities and states) is not subject to federal taxes. As a result, the interest rate on such municipal debt (munis) is often lower than even the federal government must pay. Under Sensible Tax Reform, interest rates will fall toward the level of munis today.
