Various commentators and parties have recommended that landlords should not be able to deduct interest payments on debt in calculating taxable income. More generally, ending the favourable tax treatment of debt is one of the central recommendations from the IMF, in its recent analysis of how macroeconomic policies should change in the wake of the global financial crisis (paper is here). By favouring debt over other funding options, the tax deductability of interest charges encouraged excessive leverage and thereby contributed to risk in the financial system.
Accordingly, tax reform in this area has the potential to improve allocative efficiency while also raising revenue. No doubt the shift to a new system must involve a transition phase, such that the initial improvement in revenue may be limited.