Should the federal government reduce the deductions for interest paid on home mortgages? If you put "budget battle mortgage deductions" in a search engine, you will see that this has been a proposal going back to February 2009. (See the July 21, 2011 article at CNBC.com here.)
"Tax breaks" (so-called) are always problematic. On the one hand, the money is yours, not theirs, so when they decide not to take it, they are not really giving you anything. Tax breaks for the rich should be called not robbing the plunderable -- after all, taxing poor people does not pay as well, just by definition.
However, taxes are how we pay for services from fire, police, and schools, to parks and other infrastructure. Granted that these could or should all be privatized, the truth is that they are not. So, what one person does not pay in taxes, another must, either now directly or in the next generation via inflation.
Owning land and owning your home was traditionally the demarcation of privileged class. That is why so many of the founders of the American republic argued for their right to pay taxes based on tangible property. Being merchants, living in the city, they did not own land. But paying taxes was the basis for the right to vote, as it should be. Thus, we had poll taxes, until they were outlawed for federal elections by the 24th Amendment in 1964.
(In the capitalist fantasy, What Might Have Been; The Story Of A Social War by Ernest Bramah (1907), the UK is finally reorganized like a joint stock company with one share equal to one vote, shares costing 500 pounds, and no limit on the number you can own. The book has been suggested as a lost precursor to Atlas Shrugged, though nothing in Ayn Rand's journals suggests that she read it.)
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| This Glasgwegian capitalist was homeless until about 30 years old. |
The poor of America, coming from Europe, easily understood the status accruing to land ownership. At Pretense of Knowledge, is a chart from the Joint Committee on Taxation JCS-3-10 showing the tax deductions enjoyed by households with incomes of $100,000 per year and less. Before the latest meltdown, almost any steady income and a modest down payment would qualify you for a loan.
Having your own home was easier when the land was open and 90% of us were farmers. Owning a home in the city was always harder and city dwellers - rich or poor - were most often renters. If you think of the old Make Room for Daddy (Danny Thomas) or I Love Lucy shows, as New Yorkers, they lived in apartments - Lucy's was more modest than Danny's, which had a walk-up to the bedrooms left and right.
Everything has a price. The federal government granted tax breaks based on the interest paid on mortgage loans. The early years are all interest, of course. So, this was an incentive for young families. The system worked fine as long as employers in particular and the local economies in general were doing well. However, with a downturn, the home owner is not free to move to the next place. Now, we see not just the downside, but the nadir.
If, instead of mimicking manorial barons and yeomen, Americans had understood deeply the bourgeois ethic, our cities would look much different, and our mobility would ensure both our freedom and our prosperity.
If, instead of mimicking manorial barons and yeomen, Americans had understood deeply the bourgeois ethic, our cities would look much different, and our mobility would ensure both our freedom and our prosperity.
Moreover, landlords really do not pay property taxes. (Interesting word, "land lord." Lord is a contraction for "loaf warden" a deeper echo from the stone pit of feudalism.) Farmers do pay taxes, of course. Homeowners do, too. But the rentee pays the landlord's taxes, though as with any business, many commercial rentors face tax bills without rentees to cover them. In Ann Arbor, the final demise of Borders follows abandonment by Pfizer in 2007, even if the automotive industry were not moribund. So, times can be hard for everyone.
But commercial rentors ("landlords") do not enjoy tax breaks on the interest of those rental properties. The laws favor the single family in a single home. Again, as long as we pay for public services with taxes, it is impossible to not tax one person without taxing another more. That still leaves unanswered the more basic question: How is the interest paid on a mortgage different from any other interest, whether paid for a credit card, or paid by a corporation to its bond holders?
So what would happen if donations to government organizations were 100% tax deductible?
ReplyDeleteIt is an interesting concept; and I followed it back to your blog which I then added to my own links list. Thanks.
ReplyDeleteThanks, I just started my own link list...you're the first one on there.
ReplyDeleteIt's really strange that so many economists fundamentally understand how the invisible hand is incredibly more effective at efficiently allocating resources...yet none have considered applying market principles to the public sector.
The only difference between a public good and a private good is that people can free-ride off the contributions that others make to the public goods...thus decreasing the financial incentive for companies to produce public goods. But once people are forced to pay taxes then the invisible hand should be allowed to determine the most efficiently allocation of limited public resources.
So far I can't think of any situations where we wouldn't want to subject government organizations to survival of the fittest.
There is the moral barrier: they know better than we do. So, we cannot just pay as we chose.
ReplyDeleteThat aside, see James Buchanan and Gordon Tullock under "Public Choice Theory" on Wikipedia.
I actually have Anthony Downs's An Economic Theory of Democracy but never got far into it.
A while back I e-mailed the president of the Public Choice Society (which was founded by Gordon Tullock and James Buchanan) and he responded that it was an "interesting" proposal...but I never heard back from him after that.
ReplyDeleteIn terms of applying market principles to the public sector...Buchanan mentioned that some have criticized public choice theory because people have different motivations when they make choices in the public sector compared to when they make choices in the private sector...
"More specifically, economic models of behavior include net wealth, an externally measurable variable, as an important “good” that persons seek to maximize. The moral condemnation-criticism of public choice is centered on the presumed transference of this element of economic theory over to political analysis. Those who find themselves in roles as public choosers, whether as voters, as legislators, as political agents of any sort, do not, it is suggested, behave in accordance with norms that are appropriate to behavior in markets. Persons are differently motivated when they are choosing “for the public” rather than for themselves in private choice capacities. And it is both descriptively inaccurate and morally questionable to assign self-interest motives to political actors. Or so the criticism runs."
The criticism completely ignores the non-profit side of the private sector though. People aren't trying to maximize wealth when they donate to the Red Cross...just like they wouldn't be trying to maximize wealth when they allocated their taxes to FEMA.
A few economists have studied the "warm glow" effect of making donations...but none of them have considered how much "warm glow" taxpayers would feel if they could choose which GOs received their individual taxes.