Mortgage Interest Deduction, part 4

After a bit of a hiatus, we’ll come back now to the main line of argument against the MID.  In this part, I’ll tackle, or at least address, a broader issue:  Should the government be in the business of promoting home ownership in the first place?

I think this question is very important, especially considering that some of the arguments I made in part 3 could be considered dancing around the main issue.  In that part, I argued that the MID, at least as it’s implemented, doesn’t really increase home ownership, but it’s quite possible that by tweaking the logistics of the tax break, the government could somehow come up with a tax subsidy policy that actually would increase the home ownership rate.  So, let’s jump in.

Think about the basic argument for why the government should promote home ownership. In its most general form, it’d go something like this:

  1. Home ownership has social benefits (what economists would call positive externalities).
  2. The government should promote things that have social benefits.
  3. Ergo, the government should promote home ownership.

I grant that 3 follows from 1 and 2, so let’s look at 1 and 2 more carefully.

Does home ownership have social benefits?   I think this is almost entirely an empirical question, so I won’t bother with any philosophical ramblings on the topic.  I’ll just quote again the excellent paper from the Urban Institute:

The main argument for subsidizing homeownership is that ownership may provide positive spillover effects to individuals other than the owner. For example, it is possible that homeowners take better care of their property, are more engaged in local politics and community building, and are more willing to invest in the community than renters because the higher home values that community amenities produce benefit them directly.5 Previous research has found evidence that homeowners are more likely to perform maintenance and have higher rates of civic participation than renters and that crime rates are lower in areas with more homeowners (DiPasquale and Glaeser 1999; Galster 1983; Glaeser and Sacerdote 2000; Glaeser and Shapiro 2003; Rossi and Weber 1996). The direction of causality between homeownership and these spillover benefits, however, is difficult to demonstrate. People who are more likely to participate in community activities may also be more likely to own homes, so that homeownership itself does not necessarily cause higher community engagement.

Basically then, we have an answer of “maybe”.  This isn’t the most satisfying of conclusions, but it’s often the reality of research into the effects of public policy, a point I’ll come back to whenever I get around to writing that correlation/causation post (though given my track record of rambling here, maybe that’ll turn into its own series of posts, too).

Even if we can’t tell for sure if there are real social benefits, though, there’s still reason to doubt the effectiveness of housing subsidies as a way to achieve these benefits.  Though it’s more or less impossible, as far as I know, to ascertain this from actual data, I’m always suspicious of indirect ways of promoting socially “good” behavior.  If, for example, taxpayers decide that civic participation is important enough to warrant tax subsidies, why not subsidize civic participation, instead of subsidizing home ownership, which may or may not kinda sorta lead to an increase in civic participation?  This is why I find it unconvincing to present a laundry list of supposed benefits as evidence of a need for special tax treatment (sometimes, by the way, including such outrageously unbelievable claims as health benefits!); even if home ownership really does cause some of these social benefits, that doesn’t mean it’s the most cost-effective way to achieve them.

There’s another hint about what’s really going on in a paper published (surprisingly, to me at least) on the NAR website.  I’ll just quote what I find the most relevant summary of the findings:

As we shall see, the purported benefits of homeownership may partly arise not directly from ownership, but from greater housing stability and social ties associated with less frequent movements among homeowners. Therefore, policies to boost homeownership can raise positive social outcomes, but only to the extent that homeownership brings housing stability.

Intuitively at least, this makes a lot more sense to me as the real causal explanation of many of the positive social outcomes associated with home ownership, such as lower crime rates.  Home ownership does tend to be associated with lower housing mobility, and I find it totally believable that the stronger social ties in stable neighborhoods have other benefits.  Once again then, I’d say that, if you think the social benefits are worth subsidizing through the tax code, you should do the subsidizing more directly and come up with policies that promote housing stability (not necessarily the same policies that promote ownership):  for example, a moving tax, or subsidies for long-term leases for renters, strange as those ideas may sound, might do the trick much more cheaply.

On then, to question 2:  Should the government promote behaviors that have social benefits?  I’ll admit that I’m in way over my head here, and am most certainly not qualified to give anyone a lecture in what the proper role is of government in dictating citizens’ behavior, and I’m extremely unlikely to change anyone’s opinions on the subject.  I’ll just tell you a few of the issues that I think about when I’m considering this question and leave you to figure the rest out for yourself.

Let’s get the obvious out of the way right at the beginning.  The main reason I’m skeptical of just about all tax “breaks” in the first place is because they are, in a sense, zero sum.  If I get a $1 tax break for whatever reason, some combination of the following 3 things must happen:

  1. The government spends $1 less on something, i.e., some government employee or beneficiary of a government program gets $1 less.  (To readers finding themselves laughing hysterically that I would even suggest this, just know that I’m only including this is as a logical possibility from an accounting perspective, not a practical one.)
  2. The government makes someone else pay $1 more in taxes.
  3. The government goes $1 more into debt.  You might break this possibility into two sub-cases:  Some future taxpayer pays $1 more in taxes, plus interest, to pay back that $1 in debt, or my $1 tax break contributes to the U.S. going bankrupt at some future date, taking away $1 more from some U.S. bond holder.

That’s it; there are no more possibilities.  So, I find the idea of a tax break is something of an illusion.  Really, all the government can do is make someone else pay your taxes for you.  For the time being at least, I think possibility 3 is really the only one likely to happen.  Personally then, I think of the litmus test for a tax subsidy for behavior X as:  could I look an imaginary future taxpayer in the eye and say that I am justified in making him pay more taxes because I did behavior X?

My general sense of fairness to that hypothetical future taxpayer leads me to think that behavior X ought to have benefited him in some way if I’m going to put him on the hook for the bill.  Or, if it does not benefit that particular future taxpayer, at least it should benefit a reasonable number of future and/or current taxpayers in aggregate.  To me, most tax deduction that we allow, and the MID in particular, don’t really fit this bill.  One particular exception that comes to mind, which I think is helpful as a point of comparison, is the deduction for charitable contributions.  Giving money to an organization which directly benefits other members of society strikes me as a reasonable justification to allow a tax break:  If I’m giving $1000 to help other people, then I don’t think it’s unfair to ask others to foot the income tax bill on that $1000,  and to the extent that this policy has a real effect on the total amount donated to charity (though that’s actually quite debatable), the policy makes sense to me.  But, according to the tax code at least, me paying $1000 in interest on my mortgage is just as beneficial to society (in the sense that it earns me the same tax treatment) as someone giving $1000 to feed hungry children.  I’d have a tougher time explaining that one to whoever’s paying the taxes on my mortgage interest for me.  Once you’ve allowed tax subsidies for behaviors like home ownership which have, at best, indirect social benefits, I think you’re on a pretty slippery slope:  In principle, why should we not also then subsidize, say, smiling and waving to your neighbors when you run into them on the street?  After all, those stronger social ties will reduce crime in the whole neighborhood!

One other thought on the fairness of the MID in particular that comes to mind for me is the example of the academic, probably because I’ve spent so much of my life in the higher education system.  To keep it short, I’ll just say that lots of people who want academic jobs can’t get the tenure-track job that they want, even though they may have the required degrees and considerable aptitude at both research and teaching, the two pillars of an academic career (why there are so many such people is a topic about which I could easily write a series of posts equally as long as this one).  The best available jobs many such prospective academics can get are euphemistically referred to as “fixed term” faculty positions, which essentially means that they are hired for one to two years, given a higher teaching load and paid substantially less than their tenured peers, and unceremoniously dumped by the roadside once their fixed term has expired, leaving them to find some other crappy fixed term position elsewhere.

What on earth does this have to do with taxes?  The luckless soul stuck in this career path doesn’t have any real sense of stability, in either the sense of job stability or residential stability.  Given the economics of home ownership and his likely need to relocate frequently, it typically wouldn’t make sense for him to purchase a house.  As a result, the fixed term faculty member will end up paying a higher effective tax rate than a homeowner with the same income.  He’s being punished by the tax code for his choice of profession (or, I suppose you could argue, for his lack of success in that profession, but that’s beside the point).

To me, this is just one example of how the MID, even though it might be associated with (and sure, might even cause) some positive social outcomes, is really a subsidy of what I consider more of a lifestyle choice than anything else.  Even if it does make sense in the aggregate as a way to promote positive behaviors (a doubtful proposition, as I’ve discussed above), it still doesn’t make sense to me on an individual level.  A particular taxpayer might do all the behaviors that the MID is supposedly promoting:  he might be involved in the local community, have strong social connections with his neighbors, maintain his home meticulously, and be involved in local crime prevention efforts, all while being a renter.  I can’t imagine telling that hypothetical renter that he ought to pay higher taxes than I do because I happened to buy my place, while for whatever reason he chose to rent his.

Stay tuned for part 5, when I propose how we untangle ourselves from this mess in a way that’s (relatively) fair to everyone.

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6 thoughts on “Mortgage Interest Deduction, part 4

  1. You forgot an important way to pay for a $1 break — the US government can print an extra $1 of currency and inflate the debt away. The implications of that approach affect a broad range of entities, including foreign sovereign nations with US dollar reserves.

    • Indeed. I guess I could try and wiggle my way out and say that that approach kind of falls under option number 2, but I should have thought of it and listed it separately. Maybe, 4. Make foreign people pay some of my taxes for me by decreasing the value of the dollars they hold.

      For the record, though, I wouldn’t feel much better morally about telling foreign governments to pay my taxes for me because I bought a house.

  2. Your point about charitable contributions highlights an important point about “social benefits” generally; namely, that someone’s social benefit is another person’s social harm. I understand the rationale of thinking of “charity” as a black box, something that everyone can agree is “good” (i.e. feeding hungry children). But a lot of charitable organizations aren’t so clear-cut and many have agendas that a lot of people would have problems with. Perhaps this year I will donate to a radical environmental group, a fringe religious group, NPR, and the NRA. Those future taxpayers will be subsidizing my generous contributions to these groups regardless of their feelings about whether such groups actually produce any social benefits.

    • Yeah, I thought about going into that as well, but realized I didn’t want this post to become the length of a term paper, so I edited that section out. I think there absolutely ought to be a pretty high standard for what constitutes a charitable organization (a higher standard than we currently have, at any rate), but there’s lots of room for debate on individual cases. I certainly welcome such debate, especially to the extent that it makes people think more carefully about what they’re subsidizing with their taxes, and what the justification is for the subsidies.

      For what it’s worth, I had to think for a minute or two to come up with the feeding children example, which I hoped would be uncontroversial enough at least for the sake of example. Lots of charitable causes that came to mind initially didn’t really seem iron-clad on second thought.

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