Monday, December 6, 2010

Bad policy likely to remain law

Via Ezra, Adam Ozimek has a rather depressing writeup of some research on the home mortgage interest deduction (MID).  Not only doesn't the MID enhance homeownership, it actually drives up home prices in some areas.
We spend around $100 billion a year on this subsidy, and to the extent that it’s defenders are correct and homeownership does have positive externalities, it is actually making urban areas worse off.
Ozimek recommends replacing the MID with a subsidy on down payments.  That sounds all well and good from a policy perspective, but I just can't see that happening.  Basically, it would involved a huge number of current homeowners paying more money each year in exchange for granting a break to future homeowners.  I don't know the actual numbers, but I'm guessing that current beneficiaries of the MID make more money, are more likely to vote, and are greater in number than those likely to initially benefit from a down payment subsidy.  Besides, those currently benefiting from the MID will fight tooth-and-nail to keep it and would likely heavily punish any party that proposed eliminating it.

Subsidies, even ones that do not serve any clear public good, are incredibly hard to get rid of.  Keep in mind that we still have a National Helium Reserve, which was built in 1925 to ensure our success in the impending blimp war with Germany.


Will said...

Just as a side note, Zeppelin attacks may have been the original fear in 1925, but there has been an awful lot of discussion recently about how bad an idea it was to sell off the Helium Reserve in 1996:

I don't really know what my point is, but whatever.

Seth said...

Just admit you're in the tank for Big Helium.

Get it? Tank?

Andrew Oh-Willeke said...

There are lots of ways that one could tame the MID without abolishing it.

If the issue is equity between renting and owning, a deduction for residential rent of non-homeowners could be established.

Other approaches would be to end the second home mortgage interest deduction, to disallow the mortgage interest deduction to the extent that there it exceeds the jumbo loan level, to narrow the availability of the MID for home equity loans, and to cap the MID loan amount at some fraction of the purchase price for the property (perhaps 80%) to discourage overleveraging.

One could also end the MID only for new mortgage debt, while retaining it for old mortgage debt and refinancings of that old mortgage debt, given the reliance interests involved.

The most respectable tax policy argument for the MID is that the income tax is designed to capture not all income, but a good rough justice approximation of disposable income. Disposable income is total income less certain basic costs of living. The main factor that causes the cost of living to differ from place to place is housing. The mortgage interest and property tax deductions on residences are the main device by which taxes as a percentage of true disposable income are equalized between places with high costs of living and low costs of living.

In other words, making $80,000 a year in New York City does not afford you the standard of living that making $80,000 a year in Youngstown, Ohio does, so imposing the same amount of taxes on each unfairly overtaxes the New York City resident. The mortgage interest deduction and property tax deduction captures most of this discrepency, leaving the pair on a more equal footing.