Sunday, November 16, 2008

Mortgage Interest Deductions - more interesting than you think!

School and work has been crazy this week, I should get back to my one-ish a day posting now.

Currently, I'm totally absorbed in the absurdity of the home mortgage interest deduction. Being a renter, I was totally ignorant of this. It's actually an old stalwart from the initial introduction of our income tax in 1913. Back in the day people paid cash for everything including homes so the interest deduction was primarily envisioned for businesses. Over time, this tax policy - originally intended to encourage business investment - has evolved into one that is defended on the grounds that it promotes homeownership.

Putting aside for the moment whether the government should even be in the business of promoting homeownership, the mortgage interest deduction (MID) is an inefficient way to effect marginal homeownership rates, encourages suburban sprawl, and distorts savings and investment rates. Some also argue that the government is "spending" too much on the mortgage interest deduction, but that assumes that our paychecks are the government's property first and ours second. Since the mortgage interest deduction is primarily utilized by itemizers who are wealthy, the MID doesn't encourage people to buy homes that wouldn't have necessarily purchased otherwise. The MID really just inflates home prices and encourages people to purchase beyond their means which encourages bigger homes further out from city centers. I wouldn't make the environmental argument against it (people have to drive farther and use more energy in bigger homes), but I do have disdain for the inefficiency and sterility of surburbia and thus oppose the MID on those grounds. Lastly, the MID encourages investment in a highly illiquid asset - residential property - and we've seen the costly effects of this in the current crisis. Americans don't save. They rely on their home equity which can be a dangerous gamble.

So on Wednesday, I have to debate an alternative to the MID. The assumption being that it is politically infeasible for the state to totally get out of promoting home ownership and the "American Dream." So we're debating whether we should just nix the MID and not promote homeownership at all or an alternative policy that subsidizes first time home buyers. Somehow I ended up on the government subsidy side, I'm trying to look at it like a challenge. More later this week on how the debate turns out!

Hat tip: my PUBP 741 group members john, tyson, and ryan

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