In our discussion on Sunday’s poll about whether government policy should be steering people into homebuying, I had an interesting idea that I thought was worth sharing with the whole class.
There are numerous problems with the methods the government has used and is using to promote homebuying. One-time homebuyer tax credits just shift demand around, getting people to buy a few months or a year before they would have otherwise bought. The mortgage interest deduction is more of an encouragement for people to borrow money than it is to buy a home. Thankfully the tax credits seem to stand little chance of returning, but given the fact that the National Ass. of Realtors is the fourth-largest buyer of politicians in the nation, it seems unlikely that any of the current talk of eliminating the mortgage interest deduction will come to pass.
Let’s assume for a moment that the government is never going to get out of the business of social engineering when it comes to the housing market. However, let us also assume that it is possible to replace inefficient policies with more efficient ones that achieve the same social engineering goals.
What if instead of just eliminating the mortgage interest deduction, we replaced it with something more fair that could achieve the goal of encouraging home ownership (thus placating the Realtors and their bought-and-paid-for legislators) without also encouraging massive, ever-increasing debt? Here’s my proposal: Replace the mortgage interest deduction with a single flat deduction for owning your primary residence.
My flat deduction would work the same way the dependent exemption works today. One flat amount applies to the whole nation, available to anyone who owns their primary residence. You can only take it on one home at a time, and it doesn’t matter if you have a mortgage or not, you get the deduction as long as you keep your home.
Having a flat homeowner deduction instead of a deduction based on how much mortgage interest one pays would encourage home ownership without promoting excessive debt. This program would reward people for actual home ownership, not just home indebtedness, as they would continue receiving the deduction even after they have paid off their home.
You could also build additional features into this plan to encourage other aspects of responsible home ownership, such as if you have a foreclosure on your record, you’re not eligible for the deduction for at least seven years. This would discourage people from the “buy and bail” strategy that some have been employing to get out of paying the mortgage on a home they overpaid for.
“But what about the fact that homes are more expensive in San Francisco than they are in Topeka? Shouldn’t buyers in more expensive cities get a larger deduction?” – Why should they? If you choose to live in an expensive city, you know what you’re getting into. It also costs a lot less to raise a child in Topeka than it does in San Francisco, but the Dependent Exemption isn’t any different. Why should the home owner deduction get special treatment?
“The mortgage interest deduction is sacred. Any attempt to eliminate or adjust it will destroy the economy, and possibly the entire universe.” – Hmm, it is rather difficult to argue with such impeccable logic. How about we just give it a shot and see what happens?
So, that’s my proposal. What do you think? What objections come to your mind? The main reason I can think of that it will never happen is that it is just too practical, not complicated enough, and doesn’t result in enough kickbacks to powerful industries. But maybe I’m just too jaded about politics.
[Continue Reading - Part 2: Running the Numbers on the Flat Homeowner Deduction]