Question

Consider the case of a borrower within the life-cycle model of consumption and saving. Explain and illustrate how borrowing changes in response to a proportional tax on interest under the following situations.

a) Interest earnings are taxed, and interest payments are deductible   
b) Interest earnings are taxed, and interest payments are non-deductible

Answer 1

Answer :-

(a) :- In the situation when Interest earnings are taxed, and interest payments are deductible the borrower will build their borrowings and will have more noteworthy open door for development in the business. Regardless of whether an interest payments can be asserted as a conclusion against a citizen's available salary will essentially rely upon the utilization of the acquired cash and interest earnings are consistently available. In the event that the acquired cash is utilized for a non-pay creating reason, the related interest will typically not be charge deductible. The contrary circumstance doesn't really ensure a duty reasoning. When all is said in done we find in the market business loans are more popular when contrasted with individual loans since interest payments to business loans are charge deductible and interest payments to individual loans are non deductible.

(b):- For the situation when interest earnings are taxed and interest payments are non deductible the interest for borrowings will go down banks and FIs won't have a lot of potential in the market and will be less preffered. As in India home loans are popular one of the explanation is interest payments are deductible and for individual loans or some other non-pay delivering loans are non deductible.

**Hope its helps you...kindly please like the answer.**