Friday, August 12, 2011

Casey B: Elimination

RE: Casey B. Mulligan's The Misunderstood Mortgage Interest Deduction:

The housing boom and bust of the last decade, and government revenue shortfalls, have brought back the topic of whether the government excessively encourages home building. Those discussions invariably mention the elimination of the home-mortgage interest deduction.

Of course.

Now that the economy has crashed under the weight of unaffordable housing. Now that home values are less than mortgage balances. Now that foreclosures are as common as dandelions. Now they want to eliminate the home-mortgage interest deduction.


Maybe you would grandfather it in, so that it affects no one whose decisions were made beforehand. That's merely unfair to everyone else. But to eliminate the tax deduction for mortgage interest and screw people out of the tax breaks they're counting on to get by? That is outright cruelty. As Mulligan says:

Homeowners rightly consider [the interest deduction] when considering whether and how much to invest in a home and how much they should borrow.

You want to eliminate the tax deduction for home-mortgage interest? Tell you what: First, eliminate the tax deduction for interest expense from every business tax form. After that, we can talk.


Suzan said...

Ah, but you've neglected to notice to whom he was talking.

He's only going after the little guy's expenses.

Because he knows nothing about them and thinks they are negligible, thus a great place to pick up needed revenue.

When you venture into their realm of business expenses, watch your back.

You'll be in real danger!

Thanks for your efforts.

Gene Hayward said...

Art---Agreed. A grandfathering of the interest deduction would certainly be best....Just re-reading http:/be / and need a little ferreting out a couple of thoughts as it pertains your writing. First, it seems like any remedy has to bypass the banking system to work, since this is where the credit monster is created. What if the Federal Reserve were to credit the Treasury with 1(or 2??)years worth of payroll taxes (SS and Medicare--either just one of them or both). This would cover the employee AND employers portion. the intitial result certainly would be demand side stimulative. Congress can spend that on "infrastructure" and such.It would not add to the federal debt (correct?). Paychecks would immediately be larger (make Dems happy), the cost of employment would decrease (make Reps happy). This shock to (M1--right??) would have to be off-set with an increase in the Required Reserve Ratio, as you propose. I assume there would have to be other restrictions/disincentives to borrowing implemented as well...Increase money in circulation, decrease credit use at the same time...Does this in any way fit in with your philosophy. What would you subtract? Or add? I am just looking for some fodder for the beginning of my classes next week. Students will be looking to me for a solution. I would like to present something concrete, even if not politically feasible. Thanks in advance for any feedback. I appreciate it.

Jazzbumpa said...

Art -

You're correct in the context of the current tax code. But that thing is a mess. We need a simple, fair tax - which is in no way a flat tax.

Government encouraging home ownership via tax incentives is a component of the private debt excess. You ought to consider that.

The fundamental unfairness is vis-s-vis renters.

We need a progressive tax code that treats all income equally, and has no deductions. Defined personal exemptions - yes. Deductions - no. They distort by incentivization, which easily becomes perverse.

Gene -

Some white space in a long comment enhances readability.


The Arthurian said...

You got it, Gene!

Since I wrote that paper you linked, I've become a *little* cautious about raising the Reserve Requirement. Allan Meltzer says that raising the RR is what caused the 1937 recession. But I still think the general trend of the reserve requirement should be up, not down as it has been, until it reaches a level that reserves provide the level of safety that we hope is provided by the FDIC today. Not 100% reserves, but certainly more than zero. Probably 25%, eventually.

I'd add tax incentives to accelerate the repayment of debt. Perhaps a tax credit equal to 100% of any *extra* payments you make on your mortgage, or on the part *above* the minimum payment on your credit cards, and like that.

After the economy recovers, when debt has fallen to a reasonable level, we could reduce the tax credit. This is something best worked out in practice.

On the need to bypass the banking system: Most people today blame banks it seems, or bankers or "banksters". I blame policy. If drugs were money, our policies would *encourage* people to take drugs. Most of the blame would fall on bad-guy drug suppliers in far-away lands. I blame our policies.

On the payroll tax holiday: I think this is an effective way to deal with *results*. As you describe, it both increases income and reduces the cost of putting people to work. But I insist on pointing out that the real problem in our economy is *not* the payroll tax. The real problem is excessive debt. I can accept the payroll tax holiday as a way to make things better while we are fixing the real problem. I cannot accept the payroll tax holiday as "a solution." It is not a solution.

I like the idea of having the Federal Reserve cover whatever costs must be covered in order to fix the real problem. The problem is monetary; the Fed is in charge of monetary. At the same time, the pro-credit-use policies created by Congress must be counteracted by Congressional action... or maybe by Presidential mandate? Otherwise the Fed is pouring money into a bottomless bucket.

On the shock to M1: Yes, it will be necessary to limit the quantity of debt that can be created from each dollar of money. This is the only way to counteract the inflation that would other wise result. But this limitation will not hurt growth, as the quantity of interest-cost-free money will be greater.

...The factor cost of money will therefore be less. As will cost-push inflation.

Does this in any way fit in with my philosophy? EXACTLY. You got it, Gene! Thanks.