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Obama Tweaks Tax Plan

3 min readBy: Gerald Prante

So under Sen. Obama's 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. plan, he proposed a universal mortgage credit that was refundable and it was independent of whether one had any earnings or not. Now in response to criticisms from the McCain campaign that Obama's tax credits are welfare, the Obama campaign is adding one string to the mortgage credit: you must work. (Note all the other Obama credits are tied to work.) ABC News reports the details here.

With all due respect to Goolsbee and Holtz-Eakin, this argument is pointless. The only relevant questions on this whole issue are as follows: what is the public good involved in allowing people a credit on their mortgage, and if one exists, what is the proper method of subsidization (i.e. direct spending program or refundable tax creditA refundable tax credit can be used to generate a federal tax refund larger than the amount of tax paid throughout the year. In other words, a refundable tax credit creates the possibility of a negative federal tax liability. An example of a refundable tax credit is the Earned Income Tax Credit (EITC). via the IRS)? That's it. That's all that matters. Whether one has a tax liability or not, or whether one works or not, or whether one's dog is named Fido or Max, it doesn't matter.

We can get into semantics about what's a tax cut versus what's spending and this entire notion of checks going to people who don't work, but on this issue of the mortgage credit, nobody asked Goolsbee the relevant question: why should people who have a mortgage get a credit in the first place? Why should there be a mortgage interest deductionThe mortgage interest deduction is an itemized deduction for interest paid on home mortgages. It reduces households’ taxable incomes and, consequently, their total taxes paid. The Tax Cuts and Jobs Act (TCJA) reduced the amount of principal and limited the types of loans that qualify for the deduction. ? Why should we be subsidizing housing? What is the public good here? What are the positive externalities from housing that justify such subsidization? These externalities are independent of whether or not the person works or whether or not the person has a positive tax liability.

This whole issue of refundable tax credits, welfare, tax expenditures, and so on is just maddening. The entire debate we have seen in the political arena thus far on this issue is lacking relevance. Once again, the only questions that need to be answered on the issue of tax credits are as follows:

(1) What is the public good involved in subsidizing such behavior (including redistributionist policies) and what is the optimal level of subsidization?

(2) What is the most efficient method of promoting such a public good? Should we do a direct spending program, regulatory policy, or administer it through the tax code?

Now if there is no public good with this mortgage credit in terms of housing specifically (what I would probably say is the case), then it is just a handout to people who own homes, and is really just welfare for low-income homeowners (those who don't itemize). If that's the case, then you could also call the mortgage interest deduction welfare for middle-and-upper income homeowners. But it doesn't really matter if the person works or not. It's just a handout conditional upon having a mortgage. It is redistribution to a selected group of people if it is not justified by positive externalities related to housing. The positive externalityAn externality, in economics terms, is a side effect or consequence of an activity that is not reflected in the cost of that activity, and not primarily borne by those directly involved in said activity. Externalities can be caused by either production or consumption of a good or service and can be positive or negative. question then hinges upon whether the redistribution of income is a public good in itself.