One of the toughest issues facing federal taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. reformers is how to deal with the deduction for home mortgage interest. Economists almost uniformly deride it, but homeowners, builders, and their representatives in Congress uniformly embrace it.
What’s wrong with it? For one, interest payment deductions carved some $323 billion out of the federal tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. in 2000. Not only does it distort investment decisions toward housing at the expense of computers, education and other investments that may boost productivity more than homes, but it forces taxpayers to bear higher tax rates as a result.
Some sound thoughts on the deduction from the July/August issue of The American Enterprise:
The home mortgage deduction is an equally knotty problem, even for people who like to reduce taxes. Economists tear their hair at the exemption, arguing that it encourages over-investment in housing at the expense of capital investment. “Workers with a computer in front of them are $15,000 more productive than workers without them,” says Stephen Moore, president of the Free Enterprise Fund and a proponent of the flat taxAn income tax is referred to as a “flat tax” when all taxable income is subject to the same tax rate, regardless of income level or assets. . “You just don’t get those kinds of productivity improvements from investing in housing.”
Many argue that homes will remain affordable under a consumption taxA consumption tax is typically levied on the purchase of goods or services and is paid directly or indirectly by the consumer in the form of retail sales taxes, excise taxes, tariffs, value-added taxes (VAT), or an income tax where all savings is tax-deductible. because people will have more income to spend. “Canada doesn’t allow mortgage deductions and it has similar levels of home ownership,” says Edwards of Cato. But it is unlikely that either the Tax Panel or the President will venture into this dangerous territory.