Times have changed when the New York Times’ conservative columnist, Ross Douthat, is calling for the federal government to end all the tax breaks for homeowners — what he calls a “McMansion subsidy” — built into our tax code.
In his latest column, aggressively titled “The Class War We Need”, Douthat argues that a lot of populist anger with Washington’s wealth redistribution policies are misdirected against the poor, when people should really be upset with Washington for subsidizing corporate profits, and giving tax breaks to the rich. This is an argument that anyone who has been around yours truly after a couple of beers is familiar with, but one that I had yet to hear from someone who self-identifies as conservative. Though Douthat sneakily attacks virtually all government intervention in the market, it really is a breath of fresh air. Using as a starting point, Douthat hones in on the mortgage interest tax deduction as an illustrative example of how the government actually redistributes wealth up the ladder.
It’s a new argument that this tax break disproportionately benefits the wealthy (it can be applied to a second home, as well) at the expense of those who rent, have paid their mortgage years ago, or have a more modest amount of debt. According to this report by The Tax Foundation — done back in 2006, when none other than George “Death Tax” Bush was considering doing away with the deduction — the deduction “primarily encourages larger and more expensive homes among a relatively small share of taxpayers, rather than promoting broad-based home ownership among ordinary Americans.” For instance, though those earning $100,000 and up account for only 10% of tax returns filed, they claimed a full 35% of the deduction, by volume. Not only this, being wealthier, those at the top of the bracket can afford nicer houses and therefore have a lot more interest to write off. By contrast, those earning less than $30,000 filed 52% of all tax returns in the study and accounted for only 9% of the deduction claims.
Fascinating, then, is the conservative claim that it was all migrant strawberry-pickers and other recipients of “liar’s loans” that caused the domino effect that got us to where we are now; that it was down-the-ladder redistributive wealth policies — specifically the Community Reinvestment Act, which does no such thing — from the Left that got us into this terrible mess. Well, not only has the New York Times’ reporting proven this claim false, their more competent conservative columnist inadvertently hinted at just how destructive the American cult of homeownership can be, and how the government props it up, even if it works against us.
As I recently learned from reading Slavoj Zizek, of all people, is that a large reason for the deregulation of credit markets after the dotcom bubble burst in 2001 was to redirect investment into real estate, and avoid a deeper recession. Due to the sustained low interest rates, the next decade saw an explosion in real estate construction, investment, and speculation. Zizek will go on to explain how the crisis that came represents the death of liberalism as an economic theory, but I think we can keep things a bit more grounded.
If anything, the cheap credit flow made the nation, as a whole, more like Phoenix. Phoenix has grown fifteenfold in the last six decades, but as a recent Harper’s story on the state legislature points out, unlike back-in-the-day Trenton, Phoenix and the state of Arizona as a whole don’t make much of anything. “The engine of economic growth in Arizona was growth itself” writes Ken Silverstein, “real estate in particular, but also a host of related industries, construction, hauling, landscaping, roofing, painting, remodeling, swimming-pool maintenance, architecture, plumbing, and on and on.” As Silverstein makes clear, real estate has a lot of ancillary industries and beneficiaries, many of which can actually afford a worker a decent living (construction, plumbing), others which cannot (swimming pool maintenance, architecture). But, as has become clear in Phoenix, and as a real estate developer tells Sliverstein “Arizona needs growth to grow”. It is an ouroboros that only reveals its true form once the money stops flowing.
The Arizona legislature, in addition to cutting back heavily on public spending, has sold its state capitol building in an effort to patch up the gaps in their budget for the next fiscal year. But they won’t be raising taxes. Does this not feel familiar on a larger scale?
Going back to the The Tax Foundation’s studies, let’s see what they have to say about the net effects of the mortgage interest deduction on the economy, as a whole. They pull this from a 2005 Government Accountability Office report:
Economists generally agree that the favorable treatment of owner-occupied housing, by lowering [marginal effective tax rates], distorts investment in the economy, resulting in too much investment in housing and too little business investment. The consequence of this is that businesses invest less in productivity-enhancing technology. This in turn results in employees receiving lower wages because increases in employee wages are generally tied to increases in productivity [their emphasis]
By subsidizing housing in our tax code, we stifle investment in other productive industries. So on the supply side, there are obvious problems. But there are problems on the demand side as well. In the last chapter of The Great Reset, Richard Florida argues that, on top of directing capital out of more productive and innovative sectors of the economy, homeownership provides a serious drag on workforce mobility. Homeowners are much less likely to move than renters, and that problem is redoubled when their houses are underwater. One of the more surprising statistics Florida cites is from a European study that found a correlation between homeownership and unemployment; a 10% rise in homeownership amounted to a 2% rise in unemployment. It’s not a politically popular position to take, but no economist will tell you that homeownership actually helps the economy.
With a stagnant economy, an increasing deficit, and a call to start tightening the belt in Washington, perhaps things like the mortgage interest deduction should be the first to go. It won’t be politically popular, but it will be a good step in the right direction — towards a more meaningful, permanent restructuring of our economy, and the way we build the places we live.