Free Markets, Free People
In this podcast, Bruce, Michael, and Dale discuss whether President Obama’s “Jimmy Carter Moment” is approacjing as a result of the BP Oil spill, and his proposal to eliminate the mortgage interest rate deduction.
The direct link to the podcast can be found here.
The intro and outro music is Vena Cava by 50 Foot Wave, and is available for free download here.
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I disagree with one point in Michael’s otherwise fine post about the mortgage interest deduction. It’s something I hear frequently from fiscal conservatives, and it’s a nice sentiment, but we need a better argument.
…we cannot accept the equivalence drawn between wealth transfers like Medicare, Social Security and Medicaid, and tax breaks like the mortgage interest deduction (MID). In one case, the government is taking money from someone else (despite how it has been characterized) and giving it to another, while in the other situation the government is simply deciding how much of one’s hide it will charge for its oh-so-wonderful services (a.k.a. taxes). It’s the difference between transferring money from one to another, and refraining from taking the money in the first place.
But targeted tax breaks aren’t really different, in practice, from subsidies. The numbers would work out the same if the feds cut checks each year to people who hold mortgages, but we think of the tax break as allowing people to preserve their status quo, while we think of the subsidy as an intervention.
Somebody always has to pay for government spending. A targeted tax break just means the government is going to force other taxpayers to pay for the spending, and when we’re running a deficit, that means future taxpayers.
I anticipate the counter-argument that if we send Congress more money to cover deficits, they’ll just ramp up their spending until they have equally large deficits again, so we won’t “save” future taxpayers a dime. I have two responses:
- That sounds like a fine argument for requiring balanced budgets.
- It appears that nothing short of catastrophic deficits motivates politicians to cut back on spending, and even that is an iffy proposition, so if fiscal conservatives are serious about governing, we need a better strategy than holding the Alamo on taxes.
What’s important for small-government tax policy is that taxes should (1) make people sensitive to increases in government spending (requiring balanced budgets helps), and (2) be simple and broad-based, not a tool for tinkering with social policy.
On the latter point, maybe I should give credit to Democrats for trying to undermine some of the biggest obstacles to the flat tax: the employer health benefits exemption and mortgage interest deduction. I see potential for some political jujutsu: Republicans can let the Democrats take the heat for killing the deduction, and just push for other flat-tax provisions that tend to compensate the losers. Lose the battle, win the war.
Government policy is always the unpredictable bugbear of free-marketeers. Yet, while it’s irresistibly tempting for some to lambaste libertarian types as the pie-in-the-sky Utopians, the latest tax policy scheme to come from the Obama administration is by far the most outlandish fantasy around:
The popular tax break for mortgage interest, once considered untouchable, is falling under the scrutiny of policymakers and economic experts seeking ways to close huge deficits.
Although Congress last year rejected the White House’s proposed cut to the amount wealthier taxpayers can deduct for home mortgage interest payments, the administration included it again in its 2010 budget — saying it could save $208 billion over the next decade.
Stop. Think. How is the federal government going to “save” money by charging taxpayers more? Answer: it isn’t. Raising taxes doesn’t “save” anything but the government’s ability to spend more of your money.
And now that sentiment has turned against all the federal red ink — and cost-cutting is in vogue — Democrats on President Barack Obama’s financial commission are considering the wisdom of permanent tax breaks such as the mortgage deduction and corporate deferral. Calling them “tax entitlements,” senior Democratic lawmakers have argued they should be on the table for reform just like traditional entitlement programs Medicare, Social Security and Medicaid.
Again, we need to reject that implicit assumption — i.e. that the money being “saved” is the government’s to begin with. In addition, we cannot accept the equivalence drawn between wealth transfers like Medicare, Social Security and Medicaid, and tax breaks like the mortgage interest deduction (MID). In one case, the government is taking money from someone else (despite how it has been characterized) and giving it to another, while in the other situation the government is simply deciding how much of one’s hide it will charge for its oh-so-wonderful services (a.k.a. taxes). It’s the difference between transferring money from one to another, and refraining from taking the money in the first place.
The new spotlight on the mortgage deduction and other tax expenditures comes as the Obama administration and Congress consider ways to reduce deficits the Congressional Budget Office (CBO) expects will average nearly $1 trillion over the next decade.
And there is the real problem: government spending. Because Congress has been so profligate for decades, we’re all in a real pickle now. In order to cover their own derrieres, the government needs to find new revenue. And that’s where we, the taxpayers, come in.
What’s really happening is a tax hike. Where a homeowner paid X dollars on Y adjusted gross income (AGI) before, that homeowner would be paying X+ dollars on Y + ($ spent on mortgage interest), which equals much greater tax burden.
It is true that this is a “tax break” in that the government is taking less of your money than it otherwise would, and that the tax is not spread evenly across the population. In that sense, there is no question that the “tax break” is not really fair. People who claim that this is nothing more than social engineering (by incentivizing home ownership over renting) are correct. Aside from current tax policy (where interest earned is taxed as capital gains, but interest spent is only capital loss on homes), there really is not any valid reason why owners should be treated differently than renters. The government decided that home ownership was a good idea for “society” and thus the MID was born. But now that we homeowners have been led down the primrose path, how fair is it to push us into a thicket of thorns?
Whatever the fairness, the consequences of ending MID will be drastic at best. Not only would it lower home prices in the midst of a recession, it would cast thousands (perhaps magnitudes more) of homeowners, who are currently paying their mortgages, into bankruptcy almost overnight. And don’t forget, the Bush tax cuts are going to expire on January 1, 2011. That’s a devastating double whammy. Taxpayers will be crushed, tax revenues will sink even further, and the economy may start living up to its unheralded name of “The Great Depression Part II.”
Obviously, I have a vested interest in the outcome of this policy debate. While I don’t really have any problem with ending the MID tax break (and, in fact, find much to commend about it), doing it now, without any sort of grandfather clause, would be a catastrophe. Those who relied on MID when deciding to purchase a home will be left out to dry, many of whom won’t be able to pay their mortgages in the face of severe tax hikes.
Heck, even with a grandfather clause, a struggling housing market won’t be revived by tanking home values and discouraging ownership. The only realistic result will be to, at best, trap people in their current homes and make prospective purchasers quite wary (if they could even get a loan).
Regardless of my personal interest, the impetus behind this idea is positively ludicrous. No matter what anyone says, it will not raise tax revenue. Instead, it is destined to lower them, along with the standard of living for Americans in general. Citizens who have invested in homes only to find that they are now ratcheted up into a much higher tax bracket are not likely to continue paying for those homes, nor to keep their incomes as such a level as to be penalized. People really do respond to incentives.
Whether or not this trial balloon floats, it is a good indicator of what’s to come. A government without revenue is like a starving beast on the prowl. It needs its sustenance, and it will find a way to feed, by force or guile. As I said a few weeks ago:
No matter how ingenious the plan, or divine the motives, the only way for governments to fund the welfare state is to tax the wealth-creators. As even the most Marxist of intellectuals knows, if you want less of something, then tax it. This is why cigarettes are levied against in ridiculous proportions, and why carbon taxes are considered (by some) to be the savior of our planet. Well, taxing wealth-creation works exactly the same way: tax it more, and you will get less of it. Which leads to the inexorable conclusion that, as the governments of the world sink deeper into fiscal crisis, the looters will be coming en masse.
This is the first wave of the looters. Expect more.