Tax Law Changes?
Well the President’s panel on tax reform [find it here] has finally shown its hand. The news is not so good for those among us who own homes. At long last someone in Washington has taken aim at one of the countries biggest tax giveaways: mortgage interest relief a.k.a. middle class welfare. The U.S. is one of the few remaining countries where the interest incurred by on a mortgage is tax deductible. I have been advocating reducing and then eliminating this welfare program for years. By allowing the deduction the tax code has distorted the economy: it has made home ownership cheaper than the ‘free market’ would have otherwise and has consequently diverted resources away from other, better, investment opportunities. As a result of this welfare program many more people own homes than would have been the case in a free market. At the same time this over-investment in housing has produced the kind of demand that contributed to the current housing price bubble [this does not exonerate the equally distorting effects of the excessively lax monetary policy of the Federal Reserve Board]. So while we have had a distorting tax incentive for people to buy houses that they would not otherwise be able to afford, we have simultaneously driven prices up artificially which, paradoxically, prices other people out of the market. Such is the convoluted, and inevitable, result of tinkering with the economy via the tax code. This is not to say that home ownership is bad: democracies tend to be more stable when people own their own homes. It’s just that by hiding the subsidy of home ownership we have allowed ourselves to pretend that this program is not welfare, when it patently is exactly that. How many people, I wonder, consider mortgage interest rate relief as a welfare program? The impact on the Federal budget is hidden as ‘Tax Expenditure’ and thus remains hidden in the back pages of the budget document. Other welfare programs appear up front and thus attract much more attention from the anti-social spending crowd: they are more easily identified as potential sacrificial cows in these days of right wing attacks on social spending. So the Tax Reform Panel deserves credit for ‘outing’ home ownership subsidy. Let’s see if anything comes of it.