32. Shouldn’t the interest on loans be deductible?

32. Shouldn’t the interest on loans be deductible?

Answer

There are two ways you could apply the tax - tax the whole value of the asset and make interest deductible, or tax the equity only and don’t. The second is simpler. Further, for the purposes of tax, the equity it is calculated as the value of the asset less any debt secured against that asset - so long as the debt is on commercial terms. This proviso is necessary to shut down the possibility of people shifting assets between taxable entities for the purposes of tax avoidance. A non- or low-interest bearing debt for example would not reduce your equity - it must be at market rates.