For the Bankers

Yet another way in which farms are subsidized is to subsidize the consumption of farm products. Food stamps and export subsidies fall under this heading. To some degree, these program ameliorate the harmful effects of farm subsidies, but having one program to make food more expensive while having others to reduce the expense strikes me as needless complexity.

We have a similar program for the consumers of capital: the home mortgage deduction. Make mortgage interest deductible does indeed partially ameliorate the negative effects of higher interest rates on homeowners. But there are multiple downsides to this program. And the major beneficiaries are not the homeowners, but the banks.

First, the deduction is primarily of value to those in the higher income brackets; so much for the poor being helped into home ownership. Secondly, to receive the deduction, one needs to stay mortgaged. This encourages long mortgages and second mortgages. Houses tend to stay mortgaged. This ties up capital that could be used elsewhere.

The home mortgage deduction is particularly valuable to the rich, since they are in a high bracket. This encourages rich people to build bigger houses. Hello, McMansions. This encourages second houses. Hello, vacation homes and timeshares.

The mortgage deduction discourages paying off the loan quickly. This discourages the old practice of buying starter homes; that is, a young couple would buy a small house as their first house, and quickly build equity in the house. When they get children, they would then sell the starter home and use the equity on a larger house. The starter homes would become low income housing as they age.

But suppose you want to encourage home ownership. (There are good reasons for doing so: homeowners do have a bigger stake in maintaining their neighborhoods than renters, and each home ownership is one less rental contract for the government to enforce.) One answer would be to have a deductible on property taxes for the house you live in, a homestead deductible. You could make the first $50,000 or so of home value tax free. The amount of this deductible could vary by jurisdiction. Such a deductible would be far more progressive than the current system, and extremely simple to implement.

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