“How Homeownership Became the Engine of American Inequality” (nytimes) advocates for a seemingly sensible economic policy (getting rid of the mortgage interest deduction), but I can’t see how the cited stories support the author’s argument. Here’s my published comment on the piece:
Affecting stories. And of course subsidizing unproductive investments in housing is a sure way to kill per-capita GDP growth (a worker who lives in a larger and nicer house does not get more work done), so it is hard to imagine a more counterproductive policy for an indebted government (which needs economic growth to pay off $20 trillion in debt) than the mortgage interest deduction.
That said, the author picked people who live in one of the world’s most expensive housing markets (Boston area) and they have kids and they want to have each child in a dedicated bedroom. Absent fellow taxpayers (many of them childless working drones) giving them subsidized housing, how was that ever going to work unless one parent had a high income?
There are some Americans who can afford to have kids with a moderate-income co-parent and a comfortable-sized house/apartment. There are some Americans who can turn a moderate income into a comfortable-sized house/apartment in a high-cost area. What this article shows is that the intersection of these two groups is non-existent without an ample helping of tax dollars contributed either by (a) those who have a higher income, or (b) those who don’t have kids.
Readers: Can you see a way in which eliminating the mortgage interest deduction would make housing in prime urban areas more affordable for low-income people who want multi-bedroom units? If killing the deduction slowed construction of new housing, wouldn’t the price of existing housing actually go up? And how does the mortgage interest deduction have a significant effect when we have (1) a growing population (due to immigration), (2) a demonstrated inability to construct new urban environments that are attractive?
[Separately, if you bought a house in Detroit or Cleveland 15 years ago you’ll be pleased to learn from the NY Times that “homeownership … is a proven wealth builder”]
“Can you see a way in which eliminating the mortgage interest deduction would make housing in prime urban areas more affordable for low-income people who want multi-bedroom units?”
Sure: take the savings from eliminating the mortgage interest deduction ($71 billion) and use it to expand the Earned Income Tax Credit (currently $70 billion), boosting incomes for the working poor and making their rents more affordable. (The EITC also improves work incentives, which I know you’re concerned about, by increasing the payoff to employment.)
A similar policy issue in Canada: We don’t have a mortgage interest deduction, but you pay no tax on the capital gains when you sell your principal residence. This reduces the tax burden on homeowners, therefore increasing it for non-homeowners.
EITC has also a documented side effect of reducing real wages
so that EITC + salary ~ const
If housing availability is limited, and you increase some people’s income with tax credits, won’t they just compete with each other for housing and drive the price up?
Take away the mortgage interest deduction and people can’t afford as much house. Home prices decline and the economy takes a hit due to less discretionary spending for those with existing mortgages. New construction is a tiny fraction of total mortgages.
Henry: I would definitely expect some effect on rental rates. On the other hand, I’d also expect working-poor households to put some of the additional income into other spending needs, so not all the extra income would be absorbed as higher rents. I would also expect there to be some increase in supply: as rents go up, renting space becomes more appealing.
But I wouldn’t expect any of this to happen, of course, for the reasons that Senorpablo points out (homeowners would be very angry). At best, perhaps the MID could be very slowly and gradually phased out over time.
Build the wall?
Owning a home or getting out of poverty is a mater of discipline, priorities and making scarifies in life. No government program will work if a person does not have the above and makes the determination.
I know this first hand. I have a 3 apartment rental and the folks who rent them have a better car, a better cable TV, and take a better vacation than I do. But yet their income is lower then mine and if they lose their job, they won’t last without a job for few months (which happened to some of those folks). If you are in such a situation, why buy / lease a current lease car fully loaded? Maybe hold off that vacation for few years so you save to buy a house first vs. paying my mortgage?
Sorry, but there is no other nicer way I can say this.
George A.: Sure, sacrifice and delayed gratification are important. But that doesn’t mean that it’s a good idea to give $70 billion to homeowners every year via the mortgage interest deduction.
@Russil #8: you are missing my point. Even if you take away that $70 billion and replace it with whatever new shiny program, micro managed by the smartest people on the planet, you won’t see much of a different outcome. It takes self determination, and sacrifices, to excel in life.
Here is a good news article to read: http://www.bbc.com/news/uk-38564137 When you done reading it, you will see those folks have indeed scarified and controlled their gratification.
Housing is a positional good. Really what people are after is neighborhoods. Anything that reduces the money people have to spend on houses will reduce the price. The land value tax would probably be a good idea.
Once you understand that everybody jockeying over positional goods dominates a lot of public debate and pointless striving, then highly progressive income and wealth taxes sound more reasonable. Deescalate the arms race, so to speak. Why should it take two high income earners to afford a nice neighborhood? Tax the hell out of the housing, drive the price down, and then mom can stay home if she wants.
Bobby, not a bad point. I would extend that what people really are after is not neighborhoods but neighbors, or rather the lack of the “wrong” neighbors. So as long as the tax system maintains the socially desired pecking order (and doesn’t destroy the S/N ratio), it could be taxed virtually ad libitum with very little loss in utility.
George A.,
Phil might find interesting in the bbc story you linked that for the people buying houses before 25, in the partnerships (not marriages), the female sounding names made more money than the traditionally male sounding names.
Amen on making sacrifices! Sunburnt and tired after taking off work and painting the house we rent out instead of paying someone because…wait, why am I doing this?
Interesting, Jay. Those women are protecting themselves from being alimony defendants 20 years from now! Certainly the English courts have seen their share of men trying to get paid for having been married. See http://www.realworlddivorce.com/International for one example.
Off topic (but set in Boston): “This is not about segregation. It’s about fellowship and building a community.”
http://www.bet.com/news/national/2017/05/06/here-s-why-black-harvard-students-are-holding-their-own-graduati.html
But how to ensure that a good neighbourhood remains good except by pricing out the riffraff?
‘EITC + salary ~ const’
EITC discourages participants increasing income beyond the point where the credit begins to decrease ( about $12K). Or at least reporting income above that point.
This is logical behavior on their part.
John Maynard Keynes – The Economic Consequences of the Peace, said, ““Lenin is said to have declared that the best way to destroy the Capitalist System was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity of the existing distribution of wealth.””
I think what we see is in housing prices is inflation. The value of the dollar is going down, due to weakness in the US economy, and overspending in the public sector.