I agree that the mortgage interest deduction has created a sprawl nightmare. I think we ought to scratch it in favor of a flat tax, so long as the flat tax has a low rate of 20% or less.

I have non-profits and would love to see them lose their favored tax status. How ridiculous is it that Harvard, with a $33BN endowment, is non-profit??
Leonardo | 03.14.07 - 11:16 am | #

The mortgage interest deduction single handily destroyed American cities

That might be the stupidest thing I've ever read. It's not like you only got the deduction if you bought in the suburbs.
Russ | 03.14.07 - 12:21 pm | #

Russ,

True, it applies anywhere. But it put home-buying in the reach of millions of people. Many of whom chose to move out of the city.
cicero | Homepage | 03.14.07 - 1:25 pm | #

The mortgage interest deduction single handily destroyed American cities (by making it easier for people to buy homes outside the city) and spurred the suburbanization of America with all it's environmental and economic side-effects.

I had an O RLY? moment when I read this too. Not to sound churlish, but can I see your math for such a statement? When exactly do you think "sprawl" and the alleged destruction of American cities began?

Here is an article which outlines the history of the deduction. Lowenstein takes the view that it only helps rich people and therefore should be eliminated as part of progressive politics; but I believe he's right in that it's hard to link home ownership with the deduction.

I tend to agree with Wayne Rogers in that many people don't think about taxes, equity, deductions and so forth when they buy a house -- all they care about is whether their current salary allows them to pay the monthly mortgage payment.
Jackson Kuhl | 03.14.07 - 2:32 pm | #

I am a finance person who has studied this issue and Cicero is completely right about the mortgage interest tax deduction causing sprawl.

The sprawl was caused by individuals and families who concluded that renting apartments in the city was "throwing away money" and instead bought, because of the tax deduction. They often couldn't afford buying in the city (as most people can't at this point) so bought out in the exurbs, just to not be "throwing away money." Unfortunately, their analysis was true.

I loved renting but bought for the sole reason to reduce my taxes. I was 100% motivated by the tax code, and that is ridiculous and ought to stop. All the MI tax deduction does is push up prices about 25%, screw renters and encourage sprawl, whose effect will make my live under fluorescent lights.
Leonardo | 03.14.07 - 7:41 pm | #

The sprawl was caused by individuals and families who concluded that renting apartments in the city was "throwing away money" and instead bought, because of the tax deduction.

My understanding is that most people buy because they build equity. When you rent, you have nothing to show for your lost money at the end of the month. Renting is fine and there is a place for it in everyone's lifetime, but it's like a minimum-wage job: it's not something you're supposed to do your whole life.

The tax code is incorrect because it is social engineering: politicians are attempting to encourage behavior they find pleasing. I too advocate a flat tax but even if it were to be established the swine in DC would immediately insert new loopholes to bring home to their constituents -- making the code flatter for some than others.

This is the first time I've ever encountered libertarians complaining about "sprawl," which is usually a lefty-pinko complaint that we don't all live in Soviet-style concrete apartment buildings. "Sprawl" is just an empty pejorative some people use to complain about how others live. I'll ax again: what is it and when did it begin?
Jackson Kuhl | 03.14.07 - 8:44 pm | #

Re-reading my last two posts, I realize I have been unclear. I *do* think most folks think about equity when they buy, they just don't realize *how much* they can build. Otherwise, fixer-uppers would be snatched off the market and not sit like they do. But that's good news for people like me, allowing us to do that voodoo we do.
Jackson Kuhl | 03.14.07 - 9:10 pm | #

I don't think there is anything wrong with sprawl per se. I just believe there's a natural order to things. The mortgage interest deduction disrupts this order. I haven't really thought this through. But what do I really thing through? I'm smoking crack and fucking hookers for Christ's sake. Rothbard has an interesting piece in opposition to getting rid of the interest deduction and other tax "loop holes" here (PDF)

http://www.mises.org/rothbard/fl...ard/ flattax.pdf

Lew Rockwell has an interesting solution to the problem here. (hint: let people deduct their rent)

http://www.mises.org/rothbard/fl...ard/ flattax.pdf
cicero | Homepage | 03.14.07 - 10:31 pm | #

Renting is fine and there is a place for it in everyone's lifetime, but it's like a minimum-wage job: it's not something you're supposed to do your whole life.

that seems harsh. as someone who rents and actually doesn't mind it i think i get something out of my rent every month. and i get to live in places that i might not be able to live in if i couldn't rent (versus buying). mainly i am not hassled to have to take care of any property or pay taxes on it or deal with selling it when i want to move. i just leave when the lease is up. this suits my "dislike for commitment" lifestyle. i am not forcing this on others, but find it suits me well.

that said, i have moved more times in my life than i care to count (including as a child) and i am sick of it. so if i saw a cheap property in a place worth living in, i probably would be curious to inquire.
Minerva Oblongata | 03.15.07 - 4:11 pm | #

The sprawl was caused by individuals and families who concluded that renting apartments in the city was "throwing away money" and instead bought, because of the tax deduction.

I'd be curious as to the sources used in your research. I've looked for years and the only sources I can find for the history of personal home loans in the US are Rothbard and Friedman as most people born prior to the New Deal are now dead. You basically have to look at the history of insurance companies and S&L's.

People rented because they couldn't afford to buy. That's because interest was almost never amortized on real estate except on income-producing property (farms, apartments, factories); interest-only was paid on schedule and then the principal was paid in one lump sum at the end of the term. The lump sum scared people off and it required them to save money on a scheduled basis in order to have the lump sum when the term was over. During the depression there were a large number of people defaulting on those lump-sum payments. It was the amortization of interest over long periods for personal homes (supported by the FHA legislation as part of the New Deal) that accelerated home buying. Hell, there wasn't even an INCOME TAX prior to that!

There are good arguments for and against the interest deduction, but sprawl has nothing to do with it.
Russ | 03.16.07 - 1:58 pm | #

The real advantage to home ownership is to lock in your living expenses for 30 years, and then watch most of them go away after that. But there are other ways to accomplish the same thing. You can rent your home, and then allocate the money you would allocate toward mortgage principal, interest, and real estate taxes, minus rent, to the stock market. Then, you're "building equity" in the stock market, instead of the real estate market. Building equity in your home is somewhat overrated because it is extremely non-diversified. But it's unique in that you can't borrow money at a decent rate in order to "build equity" in the stock market on a pool of assets worth more money than you can currently pay for it. I can build equity on $300,000 worth of real estate, even though I don't actually have $300,000. I can't do that in stocks - at least not as cheaply.

Regardless, the mortgage interest deduction has either made home ownership more likely than it would otherwise be or, in the alternative, it has simply artificially inflated the price of homes. Either way, without it disrupting the natural allocation of resources, things might be different.

I think the big contributor to "sprawl" is the public school system. If you have to move in order to get your kid into a better school, you're going to move. If you could simply send your kid to a better school by paying a bit more for a better school (the way you can shop at a better grocery store without actually moving closer to it), you might do that and stay in the city.
Ari Indik | 03.16.07 - 2:29 pm | #