Thinking about the unthinkable
Lost amid the stories about budgetary time pressure, rebuilding New Orleans, and even the endless housing bubble future-gloom is one that, if if moved forward, might be the biggest of them all:
A few folks are rethinking the mortgage interest deduction. As the Washington Post reported it:
The status of housing as the least-taxed investment in the
The panel, which is headed by former senators Connie Mack and John Breaux and to report to President Bush by Sept. 30, is studying options to lower taxes on many types of investments to meet Bush’s goal of spurring savings and economic growth. Changes to housing-related tax incentives will also be considered, Jeffrey Kupfer, the panel’s staff director, said in an interview.
Classical economists hate the mortgage interest deduction, which they see as distorting the pure Adam-Smith efficient equilibrium marketplace.
The mortgage interest deduction overwhelmingly benefits middle and upper income Americans
The toughest issue to tackle may be the mortgage-interest deduction, which has long been viewed as politically sacred, former Treasury secretary James A. Baker III told the panel in March.
“This is a political exercise every bit as much as it is an economic exercise,” he said.
The mortgage interest deduction by itself costs an impressive $70 billion a year, more than two and a half times the entire HUD budget ($28 billion).
Still, it has long been politically untouchable,
“You can’t touch me, I want to get re-elected.”
in large part because so many Americans benefit from it (for many Americans, it’s the only deduction they itemize).
While government studies show that 69% of Americans own their homes, only 33.6% of Americans itemize deductions, according to Internal Revenue Service data for 2003.
Though the ideal time to phase out the US home mortgage interest deduction might have been eight years ago, even today, with interest rates so low, there might be the political window to push through what could well be an entirely prudent thing to do.
Tax commission member Bill Frenzel, a former
“We have to be careful, because tax bills have hurt markets in the past,” he said in an interview.
The 1986 Tax Reform Act, which at a stroke cut property values up to 26%, was the unindicted co-conspirator in the S&L collapse and bailout.
Bush, in his instructions to the tax panel, said that it should “recognize the importance of homeownership” in considering what changes to recommend.
Well, has the mortgage interest deduction fueled prices? We’ve had it for fifty years, and only in the last eight have prices spiked up.
Fueled by both favorable tax-law changes and the lowest interest rates in 40 years, the national median home price has risen 69.3% since 1997.
Maybe the proximate cause is some other element of fiscal policy:
That year [1997], Congress allowed homeowners to exclude up to $500,000 in gains when they sell homes they occupy, and eliminated rules requiring sellers to buy more expensive homes to avoid taxes. Before that, sellers faced taxes as high as 39.6%.
Suddenly, homeowners could sell highly appreciated property and do anything they wanted with the proceeds. Taxes on the sale of homes that aren’t a primary residence also have been reduced twice since 1997 to rates as low as 5%.
Hmm, change tax law, housing prices start to boom.
The 1997 tax changes even made divorce settlements less complicated, because estranged couples no longer face tax bills when they divide real estate.
Chart skies upward right around 1997, doesn’t it?
Have we found the smoking gun of causality?
The hot housing market has played a significant role in generating
The 1997 changes “just released this tsunami of resources and wealth in the housing market,” said Brian S. Wesbury, a former chief of staff for the congressional Joint Economic Committee and now chief investment strategist at Claymore Advisors LLC in Lisle, Ill. “I believe the tax catalyst has been essential and in fact we would not have had the housing boom of the last five years without the changes in 1997,” Wesbury said in an interview.
This finding illustrates a very significant element of fiscal incentives: they boost (if not boom) markets, vastly expanding the economy, so the government, which taxes more or less every economic activity, benefits financially even if the causality is unprovable.
In Washington, discussions that begin by defining reform as ‘cut’ often end up defining reform as ‘change and expand’:
Policy objectives as legislation moves through the process.
Linda Goold, tax counsel for the National Association of Realtors in
Changing to a tax credit would mean all homeowners with mortgages would benefit.
“It’s not as draconian as repealing the mortgage interest deduction would be,” Goold said.
It’s so non-draconian it would probably boost prices still further and increase first-time homeownership.
She said her group is studying the idea and wouldn’t necessarily oppose it.
Jay Brinkmann, an economist at the Mortgage Bankers Association in
Such as whether it has a net positive effect on home lending J.
So what’s the political calculus? Will the tax panel recommend the Elton John financing plan, Goodbye Yellow Brick Road?
When will the prices come down
When are they going to crash
I shouldn’t have sold the old farm
I should have hoarded my cash
Prices can’t just rise forever
I didn’t refi when I should
I’m stuck with adjustable rate debt
Soon I’ll be singing the blues
So goodbye yellow brick road
Where the home is an endless cash cow
You can’t sell me your old townhouse
I’m going to cash it out now
