Monday, November 22, 2010

Glaeser: Scale back the mortgage interest deduction

Harvard University economics professor Edward Glaeser argues for scaling back the home mortgage interest tax deduction:
REDUCING THE national debt is a great test of our political system. ... Yet last week’s eminently sensible preliminary report of the bipartisan National Commission on Fiscal Responsibility and Reform seems to have brought forth not careful consideration but flights of fury. In particular, the possibility of reforming the home mortgage interest deduction has generated a torrent of ire. While one option mentioned by the report was to eliminate all tax deductions and credits, the more detailed Wyden-Gregg option is to limit the mortgage deduction to exclude second homes, home equity lines, and mortgages over $500,000. Lowering the upper limit on the home mortgage interest deduction should appeal to progressives, who want less largess for the wealthy, and to small-government conservatives, who dislike public paternalism. Unfortunately, the demons of discord seem to have prevented either group from embracing the reform.

The Democrats are haunted by a blue leviathan that calls for massive government transfers for any vaguely middle-class interest group. That monster was working full force last week as progressive pundits argued that capping the mortgage interest deduction at $500,000 would be deeply unfair to middle-class homeowners. Apparently these writers think that the middle class is full of people with million-dollar mortgages. According to the 2007 Survey of Consumer Finance, the median mortgage owed by a family in the top 10 percent of the US income distribution was $200,000. The median price of an existing home sold in September was $171,000. Research by economists James Poterba and Todd Sinai finds that even among households earning more than $250,000, the average mortgage is $300,000.

If liberals defend the home mortgage deduction as a vital bulwark for middle income Americans, then they are ignoring the fact that the home mortgage interest deduction is one of the most regressive parts of the tax code. Poterba and Sinai’s research finds that the average benefit created by the deduction for home-owning families earning over $250,000 is 10 times larger than the average benefit reaped by families earning between $40,000 and $75,000. Progressives also typically worry about global warming, and that concern should lead them to oppose any tax policy, like the mortgage interest deduction, that encourages Americans to build bigger, more energy-intensive homes. ...

Tea Party libertarians should fight the deduction, opposing any use of tax policy to try to manipulate the way we live. Why is it the government’s business to try to bribe us to buy bigger homes and take on more debt? ...

Reforming the home mortgage interest deduction is a good place for both parties to start getting serious.

10 comments:

  1. Glaeser is absolutely right, and the idea of capping the deduction and eliminating second homes is truly a progressive position. I'm not sure I really believe his assertion that the "Blue Leviathan" is pushing back so hard, nor that the Tea Party is so equanimitable (and true to theoretical principles) on this issue - here's my bet: Team Blue agrees to some limits, while the "taxed enough already" crowd screams that limiting this so-beneficial-to-millionaires loophole amounts to a 'tax hike', and goes to the mat on this issue, in particular over the preservation of vacation homes ("investment" properties).

    NB - I personally benefit from the second-home deduction, and it would indeed hurt a bit if it went away (mine are far far below the $500k cap, even combined), but I still think this is a great starter.

    How about using the FHA conforming guidelines for setting that cap?

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  2. Hey, that's awesome! And just as soon as Glaeser cobbles together a political majority to strip the largest perk from the largest, cross-partisan voting block in our country, we'll jump right on that.

    Meanwhile, Tea Party libertarians should fight the deduction, opposing any use of tax policy to try to manipulate the way we live. is quite possibly the dumbest thing I've read in a while. Is it possible a Harvard University professor doesn't understand that the Teabagger movement is about getting and keeping privilege for older white folks (e.g. "Keep Your Hands Off My Medicare!!!")? For these folks "wasteful government spending" maps directly to "social services for non-whites."

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  3. Oboe,

    I don't get the Tea Party movement. It's a mix of libertarians like Rand Paul and anti-libertarian social conservatives like Sarah Palin. I assumed Glaeser was talking about the Tea Party minority who are actually libertarians, rather than the Tea Party majority who are anti-libertarian social conservatives.

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  4. Montpellier said...
    "How about using the FHA conforming guidelines for setting that cap?"

    Old conforming guidelines, or new, almost a million dollars conforming guidelines?

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  5. I support limiting the interest mortgage deduction to primary homes and limiting interest deductions on really expensive homes. We need to reduce our deficit.

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  6. @Oboe - tell us how you really feel...don't hold back now!!! I completely have to agree - that was just a silly/clueless statement. Either Glaeser is a shill for the faux-Libertarian movement (the silence of the austere-ians was deafening from like '01-'09), or he's truly a dupe just taking them at face value. I really suspect the latter and this is his way of steering the conversation so as to make them put up or shut up.

    The TEA party works very very hard at being a chameleon - all things to all people - in the service of being everything anti-Democrat. Never let anyone, especially your opponents, define you, right? I guess the whole racism thing was an attempt to push them to define themselves.

    @James - I'm not really a fan of the new bubble-based highly inflated conforming guidelines - I think they, more than anything else - are responsible for keeping the DC bubble inflated. Given that something like >95% of all loans being written are government-backed (either FNM,FNME or FHA), there'd be no money out there for purchases at these prices unless you had the new guidelines.

    People will object that lots of the sales in Arlington, Alexandria, Cap Hill, or west of RCP are above the new limits anyway (and are more or less holding up), but those are supported by the lower rungs of the ladder - less glamorous housing stock elsewhere which does conform. If the lower rungs dropped, the upper rungs would follow.

    However, having said all that, I think it's good that the conforming guidelines are now indexed to local cost of living across the country. Even though I'm a doomer and looking for my dose of schadenfreude, I'm not convinced that the pain we will all experience if we truly blow up the economy by having a dramatic bubble-popping is worth the self-satisfaction. I believe the rain falls on the just and unjust alike.

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  7. "I don't get the Tea Party movement. It's a mix of libertarians like Rand Paul and anti-libertarian social conservatives like Sarah Palin."

    They are all Jesus Freaks to the max though. As long as you can hate muslims and fags, it doesn't matter what your fiscal policy is. Its the hate that bonds them.

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  8. "They are all Jesus Freaks to the max though. As long as you can hate muslims and fags, it doesn't matter what your fiscal policy is. Its the hate that bonds them."

    What you're saying is that they're all anti-libertarian social conservatives. Rand Paul is a leading figure in the Tea Party movement, and I haven't seen any indication that he hates Muslims or homosexuals. (In fact, his father Ron Paul has been a leading opponent of the Iraq War and U.S. meddling in the Middle East.)

    The Cato Institute supports the Tea Party movement because they think it's an opposition to expanding government entitlement programs. At the same time, Cato supports gay marriage (which most Democrats don't) and supports religious freedom for Muslims (which progressive icon Howard Dean doesn't).

    On the subject of gay rights, let me quote directly from the Libertarian Party platform:

    "Sexual orientation, preference, gender, or gender identity should have no impact on the government's treatment of individuals, such as in current marriage, child custody, adoption, immigration or military service laws. Government does not have the authority to define, license or restrict personal relationships. Consenting adults should be free to choose their own sexual practices and personal relationships."

    And here's what the platform says about religious freedom:

    "We favor the freedom to engage in or abstain from any religious activities that do not violate the rights of others. We oppose government actions which either aid or attack any religion."

    When it comes to civil liberties, libertarians are to the left of the Democratic Party.

    The problem with the Tea Party movement is that it's a movement of people upset with the way Democrats are running things, but they're all upset for different reasons.

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  9. @James - Cato (the Koch brothers) and the Paulists have nearly zero real, natural constituency for their own ideas, but they still need 'boots on the ground' to gain traction for their own agenda and ideas. The "base" are very much the same gang that made up the 'Evangelical' base - it's the same people re-labeled (re-packaged), a matter of necessity in order to pretend they aren't the same gang who blithely blew a hole in the budget with two wars and Medicare Part-D (the most breathtakingly massive bit of corporate socialism in history). The Paulists and Cato are cynical and know this (and don't care), but Libertarian True Believers (TM) will be disappointed.

    "Keep the Government out of my Medicare" is all you really need to understand about what binds the Tea Party ground troops.

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