Ah, what a beautiful day!
May is here, Spring has sprung and eschatologists are prophesizing about the effects of the sequester. The White House insists the path to fiscal responsibility requires more from the "wealthy and well connected." And our national debt continues to grow.
Just another day in paradise.
One difference this lovely May day is that tax reform seems to be gaining some traction. No, not the idea of increasing taxes; we saw that 'reform' on January 1st. Rather, there seems to be some support for eliminating certain deductions. In particular, the mortgage interest deduction.
I am a libertarian who craves smaller government and my initial instinct is to gnash my teeth and cry out against this unjustified tax grab. But, as I am alone as I write this and there is no one to hear my shrieks, I will resist my instincts and give this proposal further consideration.
The purpose of a tax deduction should be to encourage desirable behavior. There are deductions for student loan interest, because our elected representatives have determined that an educated populace is good for our nation. There are deductions for certain medical expenses, because it has been decided that it is better to seek necessary medical treatment than to avoid it. And there is a mortgage interest deduction, because... well, I am not sure why.
An easy answer would be that the deduction encourages home ownership. But that answer begs the question of why is home ownership important? I own a home. Well, kind of. I own it with the bank. I have a mortgage. I know that home ownership is important to me. But is it important to the United States of America that I own a home?
Many argue the mortgage interest deduction is important to the housing industry. If we eliminate the deduction, it will hurt a housing industry just now beginning to recover. Unless Congress proposes amendments to Maslow's Hierarchy of Needs, which in their arrogance they just may propose, shelter is a fundamental human need. People will still buy houses. And if they do not, they will rent houses. Regardless, houses will still be built. Houses will still be bought. And if the invisible hand of the free market decides to slow down the housing industry, that means people are choosing to spend money on other things.
Why should the government determine that the housing industry is more important than industries people are choosing through their free will to support? Absent compelling circumstances, people should be allowed to determine their own spending priorities without the dictates of the State.
Another argument used to justify the deduction is that people buy houses because they can deduct the interest paid from income when filing their taxes. I don't know this argument is true. At least, it wasn't for me. I knew I wanted a house and I chose a house that I believed I could afford. I never thought about my federal taxes when making my decision, but maybe some people do.
However, for those people who do, it is more likely the information will be used to determine the size of their house, not whether or not they will buy a house. Borrowing more money will result in higher interest payments, and therefore a bigger deduction. As such, while schools are encouraging children to save money and preaching against the evils of urban sprawl and McMansions, the government is encouraging their parents to borrow more and buy bigger houses.
I like my neighbors. I wave when I walk by their houses. I frequently chat with them if they appear to be not too busy. I avoid conversations about finances and politics because I read Miss Manners and it seems these are topics to generally avoid in casual conversation. As a result, I do not know if my neighbors have a mortgage or not. I wonder how they would react if I said "I appreciate that your house is paid for and you do not have a mortgage. I do have a mortgage. In fact, I bought a bigger house than yours and have a bigger mortgage, because I can deduct the interest. You do not get that deduction, and therefore pay a higher tax rate. Because the government thinks this is important, I do not see a need to thank you. Good day!"
I suppose my invitation to the annual block party would not be hand delivered. They would still invite me, though - they're really nice people.
There have been many causes cited for the recent sub-prime mortgage collapse and subsequent recession. Many factors contributed to it, including predatory lending, unrealistic consumers and government policies. Ultimately, too many people were borrowing more money than they could afford to buy houses.
If the mortgage tax deduction has any impact, it encourages home buyers to buy more expensive houses and borrow more money than they otherwise would have. It tempts home buyers to spend more money than they can afford. Congress should not encourage Americans to adopt its own bad habits. Instead, lawmakers should encourage fiscal responsibility. Eliminating the mortgage tax deduction is a step in that direction.
I am opposed to the mortgage interest tax deduction. However, I do have one concern about its elimination: that would result in $100 billion additional revenue for the federal government this year. That number would grow each year as the economy continues to recover. Over ten years, the elimination would mean well over $1 trillion in revenue for the government. This would put a dent in our $16 trillion national debt, but I am not confident that the money would be used to reduce debt. I am concerned it would be used to fund more spending. I am not in favor of eliminating the deduction to fund bigger government.
Given Congress' penchant for spending, the decision to eliminate the mortgage tax deduction becomes sort of a Catch-22. Given the high levels of both personal and government debt which exist in this country, Americans and their government should take steps to be more fiscally responsible. Eliminating the mortgage tax deduction would help. But doing so would likely only fuel more irresponsible government spending. At some point this will result in a tightening of the credit market and higher mortgage interest rates, which may cause Americans to be less financially responsible.
So what should Congress do? The answer is simple: do the right thing. Eliminate the mortgage tax deduction. Then resign. Allow a new group of legislators to populate the Capitol and make extensive and meaningful changes to the way that America taxes its citizens and spends their money.
This will never happen. It's hard to inspire fiscally responsible leaders when Congress refuses to lead by example. As I changed my calendar from April to May, I realized that is another thing that hasn't changed.
Comments? Please email me at firstname.lastname@example.org. I occasionally comment via Twitter @PRLivingston.