The Tax Reform Act of 1986 eliminated the deductibility of interest payments on consumer debt (mostly credit cards and auto loans) but maintained the deductibility of interest payments on mortgages and home equity loans. What do you think happened to the relative amounts of borrowing through consumer debt and home equity debt?
To determine what happened to the relative amounts of borrowing through consumer debt and home equity debt after the Tax Reform Act of 1986, we'll need to analyze the impact of the change in deductibility on people's borrowing behavior.
1. Research and Data Analysis: Start by collecting historical data on borrowing patterns before and after the implementation of the Tax Reform Act of 1986. Look specifically for data related to consumer debt, such as credit card debt and auto loans, as well as home equity debt.
2. Identify Trends in Consumer Debt: Analyze the data to identify any significant changes in borrowing through consumer debt. Look for trends such as fluctuations in overall consumer debt levels, changes in interest rates on consumer loans, or changes in borrowing habits of individuals.
3. Evaluate Changes in Home Equity Debt: Similarly, analyze the data to evaluate any significant changes in borrowing through home equity debt. Review trends like changes in overall home equity loan levels, interest rates offered for home equity loans, or changes in borrowing behavior related to home equity.
4. Compare Results: Compare the findings from steps 2 and 3 to identify any notable differences or changes in the relative amounts of borrowing through consumer debt and home equity debt. Look for evidence of a shift in borrowing behavior.
5. Consider Other Factors: Keep in mind that other factors could have influenced borrowing patterns during this period. Economic conditions, changes in interest rates, and consumer sentiment towards borrowing may have also played a role. Analyzing these factors alongside the tax law change will provide a more comprehensive understanding.
By following these steps and analyzing the relevant data, you will be able to form an informed opinion on what likely happened to the relative amounts of borrowing through consumer debt and home equity debt after the Tax Reform Act of 1986.