The Tax Reform Act of 1986 and the Composition of Consumer Debt

Victor Stango

National Tax Journal, 1999, vol. 52, issue 4, 717-40

Abstract: The Tax Reform Act of 1986 (TRA 86) phased out the deductibility of most nonmortgage interest and also introduced new marginal tax rates that reduced the tax advantage of all types of debt. I estimate that by 1991 aggregate mortgage debt was over 1 percent higher, credit card debt approximately 14 percent lower, and auto loan debt approximately 9 percent lower than they would have been without these changes. The results suggest that consumers attempted to minimize the effects of the deductibility phaseout by reallocating debt toward deductible instruments. Anecdotal evidence suggests that consumers used home equity lines to reallocate their debt.

Date: 1999
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