If the interest income is taxed and the interest payments are deductible, then the ef- fect of a tax raise on a saver’s savings is positive (namely, more saving)
If the interest income is taxed and the interest payments are deductible, then the ef- fect of a tax raise on a saver’s savings is positive (namely, more saving) while the effect of a tax raise on a borrower’s savings is negative (namely, less saving). Therefore, the government should reduce tax rates to increase private savings in a society with more savers. Nevertheless, the national savings are determined by private savings and government savings, so whether the equilibrium interest is higher or lower is also influenced by government savings.
