By Carl S. Milsted, Jr.
Like clockwork, every April 15th is the time to turn in your tax forms, time to let the IRS know who has been naughty or nice—which means that it’s also time to review the tax code, that paperwork monstrosity which grows ever more complex, drains our time, tests our sanity, corrupts our legislatures, and gives us hope that we can beat the system.
It’s that false hope which keeps the income tax popular. Though we bleed money to the government throughout the year through paycheck deductions, many of us end the annual tax cycle in triumph as we game the system for a rebate. “I don’t have to pay anything this year!” gloats the deluded taxpayer who has already paid through the nose throughout the year.
It is time for a reality check. As long as we have a gigantic government which tries to be all things to all people, as long as we have trillions of dollars in national debt, we will have high taxes. Deal with it.
Having a loophole ridden tax code wastes our time, tests our sanity, corrupts our morals, hurts small businesses, and makes the U.S. less competitive in the world economy. To end this corrupt practice, we must first make it unpopular, and that means starting with the most popular tax loophole of all: the mortgage deduction.
“What!?” you might say. “The mortgage deduction is all-American! It allows the lower classes to experience the American Dream—home ownership! We don’t want everyone renting! It’s bad for society!”
I actually agree with these sentiments, but question the solution. Does the mortgage deduction really encourage home ownership?
For the upper classes the answer is definitely yes. If your income is high enough to put you in a significant tax bracket, and you have enough deductions to make itemizing worthwhile, it makes sense to buy as much home as you can and keep it mortgaged in order to get the tax deduction.
For those in lower tax brackets, who have fewer deductions, the mortgage interest deduction provides little incentive to buy vs. rent. For the very people whom we are trying to assist with home ownership, the mortgage deduction does little.
But here is the worst part: The mortgage deduction encourages the well off to over-buy. The tax code subsidizes McMansions and beach houses. Why not subsidize household servants and fancy cars while we are at it?
Actually, doing so would be more progressive than the mortgage deduction! A tax deduction for household servants and fancy cars would benefit the servants and the workers who build the fancy cars. The mortgage deduction, however, encourages the well off to buy extra land.
As I pointed out in my previous column, land is the fixed quantity, the zero sum game, the domain where the poor are indeed hurt by the wealth of the rich. If we want to be truly progressive, we want to encourage the rich to buy labor and capital, and to discourage them from buying excessive land.
Furthermore, the mortgage deduction encourages people to stay in debt, which makes for a fragile economy. The biggest beneficiaries of the mortgage deduction are not the middle and lower class homeowners, but the banks.
If we really want to bring the American Dream to more in the lower classes, we should make the property tax progressive. How about giving every adult a deductible on the property tax on their home, say $40,000. This would allow a couple to own an $80,000 home without paying any property taxes.
Such a change in the property tax code would focus most of the incentive for home ownership vs. renting to the poor. If we coupled this with a phase out of the mortgage deduction, we would encourage full ownership.
When you are deeply in debt, you do not truly own your home. Owning your home free and clear is the true American Dream.
Carl Milsted is a senior editor for The Free Liberal.