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Did you know that Ending the Mortgage Interest Deduction Would Save the Economy?

Earlier today, the White House released a budget proposal that included trimming the mortgage interest deduction for taxpayers in the top income tax brackets. This is the first step in eliminating what many economists view as an expensive and inefficient housing subsidy. Unfortunately, many of the critics of the mortgage interest deduction focus on its immediate costs. If it were eliminated, it might bring in more than $2 trillion of new revenue for the government or—as I proposed this morning—allow up to $2 trillion of new tax cuts for the American people. Actually, I think getting rid of the housing subsidy could be an even better deal than that—providing it is done by expanding the deduction into a general tax cut instead of closing the “loophole” and raising taxes. Over the years, government housing and banking policy has resulted in far too much wealth being directed into the housing sector. Too much funding got directed away from its economically most efficient uses and toward housing instead, thanks to the advantage of various tax and regulatory breaks. RELATED LINKS How to Eliminate the Mortgage Interest Subsidy Without Raising Taxes Don’t Look Now, but the Obama Administration Just Proposed Creating Fannie Mae All Over Again Over a year ago, I explained the cost of the housing bubble in terms of human and financial capital: This is all too obvious on Wall Street these days. Most financial firms, stung by the tech bust and investor fears of tech companies, shrank their operations in this sector while pouring talent and funds into housing related sectors. Many of the big names who might have mentored the next generation of tech oriented financial professionals were driven out by legal troubles stemming from the dot com bust or by the fact that their firm’s just weren’t interested in keeping them around. The result is that most financial firms lack the in-house expertise to invest in innovative business ventures on any meaningful scale. The credit departments don’t know how to evaluate loans to these companies, the special executions groups don’t know how to make private equity investments, investment bankers stink at pitching acquisitions, and the capital markets desks do not know how to take companies public. What’s more, there was so much money to be made in derivatives and credit—largely arising from the underlying housing boom—that many of the smartest people got drawn into these areas rather than tech innovation. Basically, we got lots of questionable financial innovation instead of technological, medical, or environmental innovation. If all of this had worked out to make us fabulously wealthy, there might not be much to complain about. The tech, green and bio-tech communities would just sound like special interests complaining their favored projects weren’t capturing as much attention and wealth as the enthusiasts think is deserved. But that’s not what happened. The dearth of technological innovation is largely attributable to government regulations and a loose money policy that led to massive malinvestment. Sectors of the economy unrelated to housing were deprived of needed capital and talent, while the great quicksand of the housing boom sucked down everything. We’re now facing an historic opportunity to turn things around. If we eliminate the mortgage interest deduction, we can stop re-directing capital away from innovation. Working Americans will be free to spend, save, and invest according to their own perceptions of their needs and their sense of the future. I expect that eliminating the government incentives for spending on housing would promote dramatic innovations, making Americans more productive and allowing the economy to grow with renewed vigor. Instead of building up a Ponzi-scheme illusion of bubble-dependent wealth, we can genuinely improve our lives by allowing wealth to flow to where individuals perceive it will be best used. Scored dynamically, I think economists would find that eliminating the $200 billion a year income tax deduction, would result in economic growth that would return far more than $200 billion to the economy. In short, let's unleash the genius of free markets on the capital of the American people simply by refusing to load the dice in favor of housing. Isn’t time to at least give the market a chance?

Do you agree?


Asked by agentwanda at 7:49 PM on Feb. 14, 2011 in Politics & Current Events

Level 35 (73,667 Credits)
This question is closed.
Answers (13)
  • Why does the govt think the wealthy have mortgages?
    When this doesn't work, they'll come to the middle class for their " unexpected " losses in revenue. lol

    Answer by jewjewbee at 8:51 PM on Feb. 14, 2011

  • I have 2 words here....... Flat Tax

    Answer by itsmesteph11 at 8:18 PM on Feb. 14, 2011

  • Oops..I wasn't quite finished!

    I don't know how they are calling this a "subsidy" The taxpayer is DEDUCTING an amount NOT receiving a payment.

    They need to move away from thinking they are LOSING money just because they aren't collecting as much in taxes. They haven't LOST anything, they just didn't get more of something.

    Answer by yourspecialkid at 10:19 PM on Feb. 14, 2011

  • I think mortgage interest deductions could stand to be reformed/revamped...

    Answer by grlygrlz2 at 8:11 PM on Feb. 14, 2011

  • How about if we just stop giving people cash because they have kids instead? How about if we end ALL the credits. It is stupid for the govt to give credits when they have to do it with borrowed money.

    The truly wealthy aren't using them anyway because their assets are usually in trusts. So JJB is right, they will be looking for the $$ from the middle class.

    Answer by yourspecialkid at 10:16 PM on Feb. 14, 2011

  • That is an outlandishly ridiculous claim. The deficit is in the trillions of dollars. Ending foreign aid to all countries and ending the wars of aggression would be a wiser idea. World peace and Love to All!

    Answer by Mommy1234321 at 7:55 PM on Feb. 14, 2011

  • No, it shouldn't be "on the table". The government needs to stop this ridiculous notion that taxing the top brackets will save us all. The top two brackets already pay most of the tax -- like 40%. How much more are they expected to pay? They are doing more than their fair share. Already they are caught by the AMT. Eliminating this deduction will catch more people - the middle class - in the AMT.

    Great job, Obama. I'm so glad you're not raising taxes on people making less than $250,000.

    The more I read, the more I like the Flat Tax/ Fair Tax idea.

    Answer by May-20 at 7:44 AM on Feb. 15, 2011

  • No it won't but we don't even itemize because we just don't have the numbers. Wouldn't really matter. I'm still for the fair/flat tax and I think now when they all know our tax system needs a makeover it should be investigated.

    Answer by itsmesteph11 at 9:02 AM on Feb. 15, 2011

  • Uh huh? Why buy a house then ~

    Answer by tasches at 3:05 PM on Feb. 15, 2011

  • So they want to reduce it JUST for those in the TOP income bracket?

    I don't want to lose that deduction AT ALL, but I am no where near a top income bracket though. Now my parents were. Even with that deduction they still OWED money come tax time, for they made a LOT. I guess without it they would have owed MORE? Although in all honesty, for them to owe more still would not have HURT them, for their income was HIGH.

    Answer by Anonymous at 7:53 PM on Feb. 14, 2011