6/12/2005

Draining the Swamp

The program I'm on seems to have a very clear theme: government has gotten out of everyone's control. As one example, it has become so musclebound because of its huge network of subsidies and preferential laws, and the growing mass of lobbyist groups that have arisen to defend them, that it can get nothing done. That's the basic premise of Jonathan Rauch's book "Government's End: Why Washington Stopped Working." He takes great pains to avoid demonizing the lobbyists; after all, they are only acting rationally, given the high costs for a single group not to lobby Washington when everyone else is. If you don't get in on the action, you're left screwed.

The major problem is that lots of people say they want small government, but nobody wants to personally suffer from government's retrenchment. So every time a particular program or subsidy goes under the ax, hordes of concerned citizens shriek like the Furies and send lobbyists to save "their" piece of the pie. This is absurd, of course. We need to realize that if we want to clear away the deadwood of government, and free up the small businessman from the morass of laws that favor the big boys, we will need to suffer some pain first.

I think one good place to start would be in housing.

Everyone is worrying about a "bubble" in housing. People are overstretching their means, and buying houses they clearly cannot afford, using such risky and shortsighted methods as interest-only adjustable loans. Why, you ask, would so many people put themselves at such risk of going upside-down on their mortgage?

Simple. Because paying interest on mortgages is government-subsidized. To wit, you get to write it off on your taxes.

How many times have you heard that buying a bigger house is the best tax-shelter available (assuming you aren't extremely wealthy)? How many people do you know who have actually bought massive houses for just that reason?

This cannot go on. If sanity is not restored to the housing industry soon, we are going to end up with a meltdown that will make the S&L crisis look like small fry. We have to remove the tax-free status of interest payments. It can be done in increments, naturally, to make it easier to adjust to, but it must be done.

"But," you ask, "how can we possibly do that? Think of how much money we will be paying. We can't afford that!" So along with making interest payments taxable, we should lower the tax rate to compensate. No more subsidizing interest-only foolishness; just fair taxes across the board. (Plus, it would be "progresssive"! After all, most poor people do not make mortgage payments.)

Best of all, by doing this we will demonstrate our fundamental willingness to accept a little pain in the short term in order to correct a fundamental distortion for the long term. That is, if we are indeed willing to do so. Philosohpically, ending mortgage subsidies should be something liberals and conservatives can agree needs to happen; the only thing standing in the way is our questionble tolerance for pain. That is why we need to start spreading the word now, to get the idea out into the open.

We need to face the facts. The only way to really fix government is to suck it up and do without many of the entitlements we have ourselves demanded, and benefit from. Housing subsidies is as good a place as any to start.

7 comments:

Anonymous said...

The problem is, if you don't change the tax code first; all you will have is you do away with the mortgage deduction is an unfair tax system that is taking even more money from the taxpayers' pockets and will depress the economy by reducing available spending money. I personally don't trust the government enough to favor incremental fixes. If they are going to fix the system, just bite the bullet and get it all done at once; before the Washington pols get used to fatter pickings.

Mastiff said...

The problem with trying to take things all at once, is that you end up getting blown out of the sky. Remember what happened to Newt Gingrich?

Housing subsidies have enough special interests depending on them to make things interesting. Let's start one thing at a time.

Soccer Dad said...

How about student loans? This is a favorite target of Robert Samuelson (in addition to Amtrak subsidies). By making college more affordable, college loans make it more popular which increases inflationary pressures. This in turn leads to higher tuition. Which requires more student loans. (I'm not even taking into account the ridiculous default rate!) The result is that universities have more money than they know what to do with - leading to majors in race and gender studies and popular culture; the government has less; and students are forever indebted to the government that "helped" them!
A few years ago my wife decided to get a real degree so we took out student loans which are at a lower rate than conventional loans. That's what got me thinking. What if the government wasn't so free with its help? Might our costs have been less (because tuition would have been lower)?

Mastiff said...

It is easier, I think, to start with mortgage payments, since renters (i.e. the poor, oppressed masses) are subsidizing homeowners (i.e. the cruel capitalist pigs) exclusively, whereas college loans go to at least a few poorer sudents.

That said, I'd be happy to put college loans next on the list...

Pogo said...

Exactly how is it that paying fewer taxes (i.e. keeping more of my own money) in order to support home ownership is a subsidy?

That would only be true if the government was presumed to be the rightful owner of my income. You might better say you don't like the preferential treatment of homeowners, who pay less in taxes than do renters. But that is not a subsidy, it is a lower tax liability only.

I believe instead that you are attempting to characterize preferential tax treatment as inherently unfair, but you have not made that case. This is not subsidization, except in a 'words mean whatever I want them to mean' sort of way.

phwest said...

Actually, I rather doubt the subsidy is of any real value to homeowners at this point. The "benifit" of the subsidy has long since been factored into the price of housing, and there are few owners (at this point mostly those who built there own house), who didn't pay a subsidy-inflated purchase price to get into the game. Those in the housing industry benifit (contruction, agents (higher sales price = higher commisions), local govt and so on). But as with college tuition, the consumers get very little real benefit from it.

Unfortunately, if you eliminate the tax preference, housing prices will take a big hit. Even phased in over 10 years in a relatively low interest rate environment it would cost a lot of homeowners a good deal of money, even if they managed to avoid bankrupcy.

The best plan for eliminate the mortgage deduction is the true "flat"-tax proposal that eliminates all deductions AND taxes on investment income. By simultaneously removing both the interest deduction and the taxable income status of mortgage interest, the effect on home values should be minimal (interest rates would drop roughly the same amount as the value of the deduction, without affecting either the lender or borrower on an after-tax basis)

rattlerd said...

Pogo - there are two ways to subsidize an activity: cash disbursement to the subsidized from other people's taxes, or reducing taxes taken from the subsidized group - same effect, but less politically visible. Just like cutting Social Security benefits by increasing the amount of receipts that are subject to income tax.

Mastiff - the mortgage interest deduction is too small to really drive home ownership decisions. Credit card interest used to be deductible, but people used credit cards more than ever after it was made non-deductible again. The real mover regarding tax breaks for home owners is that capital gains on a home you own for more than two years are tax-free up to a half a mil for married couples. It's the best capital investment out there, automatically raising your profit 15-20%, depending on tax bracket...