Politics Top Blogs

Sunday, November 22, 2009

Ventry of UC Davis on NPR: Tax Deductions on Mortgage Interest, Property Taxes "Bad for the Economy"

Economist Dennis Ventry of the University of California at Davis said on NPR's All Things Considered today that tax deductions for mortgage interest and property taxes are bad for the economy.

Why? Because homebuyers simply price the expected deduction into their calculation of how much they can afford to pay for a house. This, in turn, artificially inflates the price of homes. Mortgage lenders and real estate brokers benefit but not, according to Ventry, the economy as a whole. And the inflationary effect of the deductions may have also fueled the housing bubble, while suppressed tax revenues helped drive up the Federal budget deficit.

Ventry also pointed out that the deductions for mortgage interest and property taxes are a classic example of an upside-down (i.e., regressive) subsidy, since, contrary to popular understanding, groups at the highest income levels receive many times more financial benefit due to the ability to deduct interest on huge mortgages and high property taxes on very expensive homes.

He also said that the only economist he could imagine taking issue with this argument would be one who works for the National Association of Realtors.

This is a compelling case and, to me, is an interesting inversion on a tax-related concept that I have also argued about in this blog: that popular debate centered on complaints about taxation is basically an irrelevant political straw man aimed at winning votes for conservatives from rank and file wage-earners. In my view, the amount of taxes paid by a wage-earner are similarly “capitalized” into the market price of labor.

Everyday wage-earners would not, as conservatives are fond of arguing, “keep more of what they make” if taxes were cut. Over the long run, tax cuts would simply reduce the real wage levels that workers could command. So they wouldn't "keep more"--they'd simply "make less." Think this isn't true? By all means, offer a cogent argument that persuades me otherwise.

In other words, if your taxes are cut, your employers in the long run won’t let you realize the windfall: they will simply pay you less, because they know your taxes are lower. So you might as well at least get some decent government services out of a bargain that's already a pretty raw deal for the average wage-earner.

On the other hand, cuts on income and capital gains taxes are also “upside down,” regressive subsidies, since they offer a tremendously higher financial benefit to those at upper income levels who earn not only higher wages but also earn much than the average worker from non-wage sources, such as interest income and capital gains.

Upside-down tax policy is by and large responsible for the enormous increase in wealth concentration among a small percentage of the overall U.S. population that has taken place since the 1980s. Again, I'd love to see an reasoned argument that could convince me otherwise. Bring it on. Sphere: Related Content


  1. What you're saying is completely true. I know that everybody must say the same thing, but I just think that you put it in a way that everyone can understand. I'm sure you'll reach so many people with what you've got to say.

  2. I certainly agree to some points that you have discussed on this post. I appreciate that you have shared some reliable tips.


MyBlog2u.com - Blog Directory Blog Listings http://www.blogcatalog.com/directory/economicblogs/useconics