11/29/2010

To tax or not to tax, that is the question.

Business Week’s article, The Next Home Buyers: Ozzie & Harriet, depressed me as I read it. This article provides an overview of the U.S. economy in relation to home prices and interest rates and explains how the next few years will continue to be difficult. Although interest rates are at historically low prices, potential buyers are not yet willing to purchase homes because prices are still expected to fall and the government is considering removing mortgage interest tax deductions. I understand why home prices are falling as the supply of houses is shifting rightward with increased foreclosures but I do not understand why the government is considering removing mortgage interest tax deductions. I assume the government believes it will make more money in increased tax revenue but if this is their reasoning, I believe it is flawed. If homeowners must now pay more money to the government in increased taxes they will have less discretionary money for consumer spending. If consumer spending deceases, businesses will make smaller profits and will pay fewer taxes to the government. The question now becomes, will the government make more money by taxing home owners or will they make more money by collecting money from successful businesses? I believe the latter.

5 comments:

MIA said...

I agree with the post that removing mortgage tax deductions in the short run will decrease home purchases. This decrease will hurt some businesses reducing the tax they will pay. However, people that choose not to buy a home because they no longer have this tax deduction will continue to rent which will keep other businesses paying taxes.

Ralphie said...
This comment has been removed by the author.
Ralphie said...

Another less thought of issue related to getting rid of the home mortgage tax deduction is the effect it could have on communities as more individuals are inclined to rent. It is argued that this decreases the involvement by people in the community since they are not as permanent of residents. This can have the effect of lowering the value of homes, decreasing property tax revenue, increasing crime, etc...

Dave said...

I think Walla Walla is right - uncertainty is clogging up the works these days.

As to the mortgage interest deduction, I think it is a fair idea being considered for the wrong reasons.

The reason for considering a change to the mortgage interest deduction is because it sticks out like a sore thumb. Why is that the only interest we're allowed to deduct, and is shifting other borrowing to this asset through home-equity loans part of what went wrong the last few years.

I think either all household interest should be deductible, or none of it. I lean towards the former, because that will bring household finance in line with corporate finance.

Dave said...

Sorry, I clicked publish before I was quite ready.

I wanted to address Ralphie's point. It's a common one. But, it's bizarre that it carries any weight at all.

Houses are about places to live.

Ownership of residential real estate is about household balance sheets.

Those are primary.

Everything else is secondary or tertiary. Focusing on those things first is putting the cart before the horse. If you think about it, a lot of the problems of the financial crisis arise from treating ownership as what was important, instead of shelter and financial common sense.