Monday, December 04, 2006

I'm talking about... tax law???

Andrew Sullivan wrote over the weekend that he believes the mortgage interest tax deduction should be abolished. This, predictably, resulted in some mild excoriation. The arguments in favor of maintaining the mortgage deduction are predictable- without the deduction some people would not be able to own a home; homeownership builds wealth; home ownership is "the American dream;" etc etc etc.

My use of scare quotes around "the American dream" should give you an indication of my opinion. Sullivan is absolutely correct when he suggests that we should do away with the mortgage interest deduction, and he is not alone. For my money (pun intended), it represents the problems that arise when a legislature makes law without thinking through all the consequences.

The Mortgage Deduction Encourages Perpetual Debt

There was never a particular push in Congress to make home mortgages deductible. As this article points out, the first income tax made all interest deductible- business and personal alike. Most homeowners did not even have a mortgage at all- they owned their homes outright. Which is my first objection to the deduction- the goal used to be to get out of debt, but now the goal is to remain in perpetual debt and deduct it.

Needless to say, the real beneficiaries of this are banks. It is now commonplace for people to refinance after only a few years, or as in the case of a friend of mine, repeatedly buy and sell your home, ever moving up in the market. Admittedly, the deduction is not alone responsible for this- I think the Fed deserves as much blame as anything else, practically giving money away- but the deduction plays a major role.

Of course, since it is a deduction and not a credit, the taxpayer does not actually get the break he or she believes, and this is a distinction that the banks (and government for that matter) intentionally blurs.

A deduction is a reduction in the amount of taxable income- suppose someone earns $100,000 and paid $10,000 in mortgage interest. The interest payments are deducted not from the taxes owed, but from the taxable income- in other words after the deduction is applied, the taxpayer is treated as if he/she earned $90,000. Taxes are then paid on the $90,000. Taxed at 35%, the deduction reduced the taxpayer's obligation from $35,000 to $31,500.

In other words, $10,000 in interest payments saved the taxpayer $3,500, while the banks keep 100% of the interest. The constant exhortations to refinance and stay in debt simply do not make sense when viewed this way.

The Mortgage Deduction Has Immeasurably Harmful Social Costs

Homes require land. This is axiomatic- can't live someplace without a place. Fifty years ago, people lived much closer to each other- generally in cities close to their places of business. Such close contact required that people interact with each other. The smaller plots left behind an expectedly smaller footprint.

Today, thanks largely to cheaper interest rates, and the push to refinance upward, people are moving farther and farther away from their places of business out into what was farmland not too long ago. These houses are generally much larger than the houses closer to the city, and so naturally take up much more space.

However, unlike urban centers or even inner ring suburbs, the infrastructure necessary to accommodate these emigrants simply isn't there. Transportation is almost exclusively by car, since public transit does not exist out in these places. This means gasoline consumption, which has costs of its own that are well and widely noted.

It has even been my experience that this kind of homeownership defeats the one true social good of home ownership generally- the sense of community. From the Slate article linked above- "homeownership has benefits that go beyond individual homeowners, making people into better citizens and better neighbors, reducing crime, and keeping neighborhoods cleaner."

If only that were true. Most homeowners don't give a damn about being better neighbors, owing to what I call the "Lord of the manor fantasy." During my brief tenure as a homeowner- and I am glad that I am not one of them any longer- it became apparent to me that homeowners rather enjoy shielding themselves inside the walls of their castles, indifferent to the outside world. Homeownership seems to encourage a sense of individual entitlement far more than a sense of community.

As a friend said when became a homeowner, he could sit on his porch and shout "git offa mah land!" at any passerby with impunity.

Whatever the historical origin of the mortgage interest deduction, it is clear that it has transcended its genesis, and now exists as a social program in its own right even if it wasn't intended as such, which means that Congress pretty much believes that it should remain as is- the voters certainly think it should stay. In my opinion, though, this is an example of shortsighted policy thinking- law intended to achieve an arguably laudable goal, but which has a number of deleterious side effects. Is homeownership an unqualified good in its own right? Maybe, maybe not. But I think the "maybe nots" should have been considered in a little more detail.