Challenging the Premisses
| Start with the debt problem, three views of it,
and the most important thing. Here's a longer look at the debt problem.
Here's a short one on economic policy, some surprising trends, and a few unusual policy recommendations. How'd we get into this mess? Read Policy Venn and Policies of the Venn Overlap. Still with me? Read A Matter of Life and Death. And for an overview, download my 12-page PDF |
John Cochrane sees the private debt problem
OK, mortgages taken out under the current tax law should get to keep the interest deductibility. We don't change rules in the middle of the game. But why should new mortgages get an interest deduction?
... And after a huge financial crisis, what in the world is the US government doing subsidizing debt anyway?
5 comments:
The supposition that interest deduction on personal income tax creates more private debt is mostly hogwash.
Only about 15% of income tax payers take the deduction. that is because a married household would have to owe something like 1/2 million dollars to benefit from the deduction.
The reason Congress gives the deduction is that if they didn't the people who currently get the deduction would create a corporation or trust to own their home and rent from the business entity that owned the home. The landlord gets to deduct interest like any other business does.
Anonymous jim said...
"The supposition that interest deduction on personal income tax creates more private debt is mostly hogwash."
Maybe so, but interest deductions are subsidizing private debt. One other thing you also can get a deduction for real estate taxes paid to state and local governments on your main home, a vacation home or bare land.
"Only about 15% of income tax payers take the deduction. that is because a married household would have to owe something like 1/2 million dollars to benefit from the deduction."
I do not understand this comment, I am married and until recently was able to utilized this deduction and the real estate tax deduction, and I do not come close to owing 1/2 million. The only reason I no longer use the deduction is due to the fact my standard deduction is now higher than my combined itemized deductions.
"The reason Congress gives the deduction is that if they didn't the people who currently get the deduction would create a corporation or trust to own their home and rent from the business entity that owned the home. The landlord gets to deduct interest like any other business does."
Ok, if the tax code was modified to remove the tax deduction you might be able to do this but it smells like a loophole in the tax code if a primary residence can be structured this way. It also does not change the fact that any tax deductions allowed for the cost of debt is subsidizing private debt.
OT wrote:
if the tax code was modified to remove the tax deduction you might be able to do this but it smells like a loophole in the tax code if a primary residence can be structured this way. It also does not change the fact that any tax deductions allowed for the cost of debt is subsidizing private debt.
All (legal) costs of running a business are deductible. Business interest is a cost and the govt is not subsidizing that cost anymore than any other cost.
The reason for private debt is not because the govt supports it.
The reason is that borrowing is one of the primary (if not THE primary) means of wealth acquisition.
The point I was making is that If the govt starts throwing up roadblocks to the availability of private credit it won't interfere with the access to credit of the wealthy. It will only further limit the ability to get credit to those to whom it is already limited.
In other words, it will help the rich get richer and the poor get poorer.
Okay, I see what happened here. I wanted to quote that last sentence from John Cochrane, where he relates the financial crisis to the U.S. government subsidizing (that is, encouraging the use of) private debt. But the quote seemed naked, without context. So I looked back and grabbed the first thing I came to that sounded like a topic. And that turned out to be the tax deduction for mortgage interest.
That was not Cochrane's topic. His topic was, big picture, how we can change the tax code and make it a whole lot worse. He thinks, better. I think, worse. I want no part of it. I don't want to discuss it. I don't want to bring it up. So I just took some text that came before the part I wanted to quote, and put it in there.
Harmless, I thought.
And then Jim picked up on it and treated it like Cochrane was arguing in favor of keeping that part of the tax code. Specifically, however, Cochrane said:
If we're going to 'blow up the tax code and start over,' then why would we put in deductions for mortgage interest and charities?
Harmless I was not.
Sorry Jim. I didn't mean to mislead you regarding Cochrane's remarks.
... But since you bring it up... You say:
All (legal) costs of running a business are deductible. Business interest is a cost and the govt is not subsidizing that cost anymore than any other cost.
You are comparing the cost of interest to other business costs. I think the relevant comparison is the cost of interest compared to the return to stockholders -- dividends or whatever. Compare the cost of money to the cost of money. Interest costs are tax deductible. Dividends are not.
So you see, business interest cost certainly is subsidized more than the other way business obtains money.
Therein lies the problem.
Dividends aren't a cost. They are payments to the owners.
The interest deduction is not the incentive for private
debt. 85% of the income taxpayers don't take the deduction. You are deluding yourself if you believe that eliminating the interest deduction would have any impact on the quantity of private debt. It is not why people borrow and lend.
The reason for private debt growth is that borrowing is one of the primary (if not THE primary) means of wealth acquisition.
The problem is not the private debt per se. The problem is the wealth acquisition that people are seeking from credit. If the wealth acquired is capital gains that is when the debt accumulation becomes
a problem. Capital gains are just asset inflation - there is no increased output. So when debt is chasing after capital gains that is when you see debt grow faster than GDP because credit expansion is not producing growth, but asset inflation instead. Capital gains wealth is phony and the phoniness always will be exposed sooner or later.
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