Economic Substance and The Laws of Interest: A Comparison of Jewish and U.S. Federal Tax Law

Both Jewish law and U.S. Federal tax law define interest broadly as a payment for the use of money. Nonetheless, the two systems diverge widely when determining whether particular transactions involve interest. This article compares the different approaches to the laws of interest found in these two systems, in an effort to reveal how underlying goals, practical constraints, and the structure of the legal system affects the development of the law. This article explains the laws of interest. The Torah mentions ribbit three times. The first occurs in Exodus the second mention is found in Leviticus and the final occurs in Deuteronomy. Moving forward this article explains the federal taxation of interest which says that interest is not banned under the federal tax laws, but it is often treated differently from other types of payments. A detailed analysis comparing the Jewish and the US approaches to interest concludes this article.