Friday, November 18, 2005


FIRST, LET’S KILL ALL THE REAL ESTATE DEVELOPERS. (Not serious. Just a literary trope.)

The Bush administration’s tax commission recently released a series of tax proposals. The Author’s post of Wednesday, October 12th, “Tax Panel Says Popular Breaks Should Be Cut”, agreed with the proposal to limit the mortgage tax deduction. But today the Author goes further. He proposes that this savings distorting pig be sent to slaughter[i]. There are plenty of good reasons. Here goes:

1. The mortgage interest tax deduction (subsidy) raises the price of houses. In an efficient market like the housing market, subsidies such as the mortgage interest deduction give borrowers more money to buy homes than they would otherwise have. Rational sellers know that the purchasers are subsidized and can pay more for homes. So they raise the sales price and the buyer pays that increased price.
2. The mortgage interest tax subsidy penalizes fixed-income and low-income homeowners. The government subsidized house prices in number 1, above, raise house prices and the attendant property taxes. These tax increases may be difficult for low-income and fixed-income owners to pay.
3. High house prices and high mortgage payments decrease the American savings rate. The American rate of savings reached zero % in June of 2005. That’s zero with a 0. Lower debt service payments would free up money otherwise profligate Americans could save for retirement, their children’s education, a rainy day.
4. The mortgage interest tax subsidy shifts the tax burden from homeowners to renters. Homeowner’s lifestyles are subsidized by the tax code. Renters help to make up the lost revenue.
5. The mortgage interest subsidy increases energy consumption. Since home purchase loans are subsidized, people can buy larger homes than they could otherwise afford. Larger homes mean greater energy expenditures and greater energy usage. More money for big oil, if you are inclined to bash that industry.
6. The home mortgage interest subsidy contributes to the shrinkage of farmland and open space. Again, since the demand for homes and home sizes is subsidized, more land is used for housing and less is left for farming and open space.
7. The home mortgage interest subsidy contributes to traffic congestion and attendant pollution. Once more, subsidized demand for homes encourages more homebuilding and relocation from cities, to suburbs, to exurbs. This artificially subsidized growth increases congestion and auto emissions as people drive further to work and shopping
8. Finally, the home mortgage interest subsidy was eliminated in Great Britain in the late 1980s and 1990s by the monetarist Thatcher government. And guess what? Housing prices at first fell, but then regained their price support and home prices in Great Britain have increased 300 percent since the late 1980s.[ii]

The Author acknowledges that the elimination of the tax will cause short-term disruption. But it if it phased in over a period of years, like in Great Britain, the long-term benefit will be positive.


[i] Remember that the Author is a vegetarian, so this is just a literary device. Not a call to waste a porcine.


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