Tweaking the Code

Towards the end of a generally thoughtful piece in today's NY Times about how finance continues to attract too much talent to developed economies, Gretchen Morgenson notes that "one way we subsidize debt in this country is by providing tax deductions for mortgage interest.  That policy encourages borrower to take on bigger home loans than they otherwise might."

Reform of the mortgage interest deduction has been on the table of tax reformers for a long time.  I think everybody just assumes that it is one of those quirky giveaways in the tax code, but in fact is a restriction of the principal once enshrined in the tax code from the 1913 passage of 16th Amendment empowering Congress to levy taxes that all interest was deductible from income.  I just looked it up, it was news to me.  It wasn't an issue back then because at that time, almost all interest was incurred by businesses, so financing costs were legitimate business expenses.  People paid cash for houses most of the time, and/or got land given to them by the government through homesteading provisions as the nation moved west, and then built a house out of some trees and rocks, godammit.

In any case, the mortgage interest deduction does at this point in time feel a little distortive and like a middle-class entitlement. If it is ever going to be taken away, now is the time to do it.  With interest rates at an all-time low and with almost everyone who can refi already refied, the dollar impact of the mortgage deduction to government revenues and household balance sheets should be at a cyclical low.

This is similar to what the Economist and others have argued about that explicit and implicit subsidies (i.e. tax rates too low to cover actual externalities) on petroleum.  That is, with the price of oil so low, now is the time to reduce subsidies to it (as Indonesia, India, and Malaysia have done).

If we're gonna do it, get er done.