Tuesday, February 24, 2009

Ed Glaeser, sacred cow-slayer

In the wake of $6 trillion of lost American housing wealth, now is certainly a good time for smart ideas on housing policy. One idea, courtesy of Harvard's Ed Glaeser, is getting rid of the mortgage interest deduction. It won't be easy, though. As Glaeser notes, this policy is a political "sacred cow".

With respect to the current crisis, the mortgage interest deduction encouraged Americans to leverage their houses as much as possible:
"Subsidizing interest payments encourages people to leverage themselves to the hilt to bet on housing markets. The size of the tax benefit is proportional to your debt. The deduction essentially encourages us to make leveraged bets on the swings of the housing market. That leverage means that housing price swings can easily wipe people out. We are currently experiencing the consequences of subsidizing gambles on housing."
But outside of the current situation, there are plenty of reasons to get rid of this deduction. The most important in my mind is that it is "wildly regressive", yielding proportionally greater savings for higher income earners than for lower income earners.

Glaeser advocates phasing out the mortgage deduction as part of his larger "libertarian progrssive" view: the view that large government is often used to privilege the privileged. The mortgage interest deduction is only available to people who itemize their taxes, virtually all of whom are well off. Indeed if you did want to support home ownership among the poor, a tax credit would be much more useful. This is probably a better use of taxpayer money than subsidizing million dollar houses for upper-middle class professionals.

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