Why homeownership may be bad for America
We trim this 2007 article and show why merely plugging loopholes is not enough. It appeared in the Atlantic Monthly in December. The author is an Atlantic senior editor.
by Clive CrookIn many societies, owning property was once a requirement for full citizenship. Almost all Western democracies gave property owners the vote first. Going even further, the United States lavished tax breaks for having many rooms of oneís own.
The mortgage-interest deduction exists, ostensibly, to encourage widespread homeownership. It doesnít actually do that. But it does have consequences: Itís been one of the quieter causes of the housing bubble.
The current deduction costs nearly $80 billion a year in forgone federal revenues. It is available only to the minority of households -- typically affluent -- that itemize their taxes. Households at the margin of choosing between renting and owning are not, for the most part, itemizers. The deduction has no effect on their choice, and thus does almost nothing to promote homeownership. What it does promote, studies show, is spending on housing -- that is, people who would have been owners anyway pay more for their houses. Prices are higher than they would otherwise have been, and mortgages are bigger. As many owners have learned abruptly, this can worsen economic insecurity.
Heavy spending on housing, fueled by this tax break, twists the pattern of economic growth as well. If investment in housing goes up, investment in things that would expand the economy and improve future living standards -- such as commercial building and business equipment -- goes down.
There are other problems. The value of the deduction, of course, is greater for those in higher tax brackets. And the code provides relief against home-equity loans up to $100,000, so that mortgagees, but not renters, can use tax-sheltered debt to buy new cars and televisions. None of this makes a shred of sense.
Is the mortgage-interest deduction untouchable? Ronald Reaganís grand tax reform of 1986 was radical, but not bold enough to assault the tax break for mortgages. When George W. Bush convened a panel of experts in 2005 to revisit fundamental tax reform, he told them, in effect, to leave mortgages alone.
But Britainís experience says otherwise. Under Margaret Thatcher, Britainís mortgage-interest tax deduction began to be phased out. Some 20 years later, itís gone altogether, with no ill effects; Britainís rate of homeownership is still about as high as Americaís.
The tax-reform panel advising Bush -- the one he instructed to leave housing out -- accepted the case for subsidizing homeownership but went ahead and said the mortgage- interest deduction should go anyway. In its place, they suggested a tax credit capped at a maximum of a few thousand dollars a year. If such a plan were adopted, outright abolition would be but a small additional step. This halfway reform would likely save tens of billions of dollars, which could be used to pay for other tax cuts -- the sort that donít badly distort the economy or encourage needless risk-taking. Presented as a whole, a package like this surely ought to be sellable.
Britainís current housing-market troubles show that even without the extra spur of tax-sheltered borrowing, prices can get out of hand and then scare people witless when the mood shifts. Killing the mortgage-interest deduction does not guarantee a calm and steady housing market. And admittedly, this year is not the year to be curbing tax relief for mortgage borrowers. Falling house prices are risky enough for the economy already; the economic consequences of an outright collapse could be dire.
Still, when the housing market stabilizes, Congress and the next administration should ask how we got into this mess in the first place, and then embark on a phased reform. Its benefits would emerge slowly. But a tax break that fuels speculation and overborrowing, that widens income inequality, and that fails to serve its own questionable purpose deserves a lingering death.
JJS: Would something thatís good for us when prices are rising be bad for us when prices are falling? Maybe, maybe not. Regardless, repealing the deduction is not nearly enough.
What really extends homeownership and stabilizes prices and the business cycle is to recover land rent; itís the value of the location, not the house itself, that inflates from speculation. Make that value of location a tax liability and people will shy away from owning excess land and wonít bid up its price.
Indeed, the price of houses on sites -- which is all houses -- would fall. More people could become owners. And the economy would lose its wild mood swings.
Jeffery J. Smith runs the Forum on Geonomics.
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