Can these social benefits be achieved using an approach that does not undercut the stability of the financial system? For example, suppose that a policymaker likes the mortgage interest deduction because he or she believes that it encourages home ownership.
That policymaker could consider replacing the mortgage interest deduction with a tax credit that offsets part of a buyer’s down payment toward a home purchase. Such a tax credit would encourage home ownership without simultaneously providing more incentives for households to accumulate more debt. Similarly, a policymaker may like the corporate interest tax deduction because it stimulates business investment.