Final answer:
The term for tax savings resulting from the tax deductibility of interest expense is 'The interest tax shield.' It reduces taxable income, leading to lower taxes and higher post-tax income. This concept is a key aspect of corporate finance and government policy can influence private savings behavior.
Step-by-step explanation:
The tax savings resulting from the tax deductibility of interest expense is termed as B) The interest tax shield. This financial benefit occurs because the interest paid on debt can be deducted from taxable income, which leads to a decrease in taxes owed. As a consequence, companies have a lower effective tax rate on their profits, thereby leading to an increase in income after taxes. It is a strategic financial management tool that encourages firms to use debt financing over equity, within certain limits, to maximize their after-tax income.
A tax cut increases disposable income, which implies that both consumption and savings by households tend to increase. However, tax cuts also tend to reduce government revenue, which can lead to an increase in budget deficits. These deficits may then fuel a future rise in taxes to cover the government borrowing, affecting private savings behavior as individuals anticipate higher future taxes.
Conversely, when interest rates fall due to budget surpluses or other factors, saving becomes less attractive because the return on savings is lower, thereby potentially leading to a desire to save less. In theory, tax policies that offer a higher return on savings should encourage more savings, but the actual impact depends on the elasticity of the supply curve for financial capital. If this curve is inelastic, the effect of tax breaks on the quantity of savings can be minimal.