Steve skewers extending the mortgage income tax deduction down the income scale and applying it to payroll taxes in his recent post, and admires a package with a 25% income tax only on income above $100,000 per family.
I wish first to take another poke at the first idea. Why do we subsidize housing at all? There’s a romantic view that homeownership confers all sorts of moral standing and responsibility; in my view this is a lot of nonsense. Renting doesn’t seem to have made Mark craven and dissolute (while he rides out the LA housing bubble); he was a house guest a few weeks ago and we still have all the sterling. And there’s plenty of evidence, especially now, that there’s a lot wrong with inducing people to put almost their entire portfolio into one kind of asset at one address on one street.
Housing as a consumption good seems to me to have only negative externalities; the bigger your house and lot are, on the average, the bigger your carbon footprint on my planet, and the harder you make it for me to have efficient transit and a pedestrian community. The mortgage interest deduction is pushing in exactly the wrong direction; we need fewer people living in houses with three-car garages and five bedrooms for three people, not more. Basics apply: housing (and gasoline) are too cheap, not too expensive.
The Graetz proposal has a hole below the waterline Steve doesn’t mention: it throws a bomb into the system of charitable non-profit enterprise that, with all its defects, is a virtue of how Americans have organized our society. It removes the implicit subsidy (deduction of gifts from income) for giving to charities, churches, education, and the arts from everyone below the $100K cutoff, and reduces it for everyone else from the current top rate of about 40% (including state deductions) to 25%. In other words, the price of a gift of $1000 from middle-class people will go from (say) $800 to $1000, and for rich people it will rise 25%, from $600 to $750. The overall result will be a severe contraction of charitable giving and hence of the services provided by nonprofits, so if we want those services, they will have to be provided the way Europeans do, by government. Without some assurance that this will happen – and the politics of such an expansion of the public sector are quite daunting – and a lot of assurance that we will really be happy if a large fraction of, for example, higher education and the arts are nationalized and become provided by a bureaucracy, a scheme like Graetz’s, despite its appeal on some grounds, needs to be dealt with very gingerly.