End this welfare for the rich!

Glenn Reynolds links to NYU finance professor Viral Acharya's call to fix the housing market by ending income-tax deductions for interest charges on home mortgages.

The less told story on such subsidies is what they have done to generate more demand and push up prices, he says. “One the one hand you are actually getting all your subsidies, but you are actually paying more for the property you would have liked to consume,” says Acharya. “Therefore the real subsidy goes only [to those] at the very top. It is for people who are buying a second house. It is for people who are buying more land than they would otherwise.”

Not only have government subsidies failed to really help everyday people, except to “prop up the housing market artificially,” says Acharya, but the big question also remains: Who’s paying for all these subsidies? “It’s sort of a Ponzi scheme, because the current generation is reaping all its benefits, but we’re basically scaling up our government debt in response, and someone else is going to pay for it down the road.”

I called for ending the mortgage-interest deduction in January 2003, but went into detail in November of that year.

As for the mortgage-interest deduction, that needs to go too, and I own my home and benefit from it. The main objection to its elimination is that home values would plummet if the deduction is removed.

But what that really says is that the presumed tax savings are really ephemeral because the deduction is inflating home prices. So you have to pay more than the home is worth because of the deduction. That means that the deduction is skewing prices and hiding the true value of homes, and that alone is sufficient reason to eliminate it, IMO.

However, various studies (link, link, link, for example) show that eliminating the interest deduction would have very little effect on home values, and the effect would be temporary. Most taxpayers are not in the highest tax brackets, so their deductions are relatively modest.

Moreover, normal swings in the housing market are likely to swamp the effects of tax code changes. ... when marginal tax rates were decreased in the early and mid-1980s, reducing the benefit of the mortgage interest deduction, housing prices actually rose.

Glenn concludes, "[I[f the GOP wants to let the blue-state crowd experience the joy of tax increases, they should get behind plans to eliminate or cap the mortgage interest deduction, which will hit residents of higher-priced blue-state houses harder."

The question always comes down to, Whose ox is being gored?