The mortgage interest deduction was only a topic of wonkish discussions among think tanks and Wall Street Journal editorial writers, but never with as much passion as recently displayed now that Republican congressmen are seriously proposing its phase out or capping as part of overall tax reform.

The housing lobby (real estate agents, mortgage brokers, and home-builders) love the mortgage interest deduction. Why? Well, they firmly believe that it props up the values of the commodities it trades. Some of them privately admit this, but publicly they claim that this tax break makes their commodity more affordable and encourages home ownership, thus increasing sales. They tell buyers that the the high monthly mortgage payment they are shelling out is offset by the tax deduction they can take on the many thousands of dollars they are paying annually on the interest on their loans. In effect, this is an admission that the government is subsidizing a portion of their mortgage payment. This subsidy is always taken into account when homebuyers decide on how much house they can afford when financing their purchase.

What is the real effect of this tax subsidy? Does it affect the cost of (a) mortgages (interest rates) or (b) home values? Let’s consider each one individually, along with claims made by the housing lobby.

Mortgage Interest Rates. Lenders claim that the mortgage interest deduction helps keep interest rates down, and point to the lower rate relative to consumer loans. But a subsidy affects the cost of a commodity, not its price. This is an important distinction. When you purchase a product that is subsidized by a third party, you may think that your cost for the product is reduced by the amount of the subsidy. However, the price of that product is set by the market. When the government began offering rebates on digital TV tuners, the price of the tuners rose by the amount of the subsidy, because consumers were going to purchase them anyway. There are many factors that determine mortgage interest rates, but the tax subsidy is hardly a significant one.

Home Values. Lenders claim that the mortgage interest deduction makes housing more affordable, by reducing the monthly payment amount by the amount of effective subsidy available via the tax deduction. In other words, this effective subsidy results in an effective monthly mortgage payment being significantly lower than the actual monthly mortgage payment. A competent real estate agent will determine the highest effective monthly payment the buyer can afford, and then add the mortgage interest deduction subsidy to arrive at the actual montly payment to determine the buyer’s price point. They therefore claim that elimination (or capping) of the subsidy would have several immediate effects:

1. The actual monthly payment would have to be reduced to equal to the effective monthly payment. This lowers the buyer’s affordability price point. For example, if a given buyer’s price point is established at $200,000 with the subsidy, it could conceivably fall (depending on his taxable income) to $180,000 without the subsidy.

2. At the lower end, many first-time buyers would not qualify without the subsidy and would therefore be unable to enter the home-ownership segment.

3. The market-wide effect of price point reductions in certain market segments would be an overall decline in home values throughout all segments.

4. Overall reductions in property values will also reduce the demand for credit, weakening the financial industry and attracting less investment capital into real estate (as well as home construction) as investors seek higher returns elsewhere. This could lead to a housing shortage in the longer term, and higher rents.

5. Overall reductions in property values will also reduce property tax revenues, further stressing local and state budgets.

6. Finally, reductions in property values along with the mortgage interest deduction will drastically curtail the practice of leveraging home equity for other economic activity (home improvement, consumer purchases, etc.) of the type that helped fuel the real estate and consumption boom of 2003-2006.

It would be hard to dispute any of these claims, as they are consistent with accepted economic theory and empirical observation over the past decade. But what deserves examination is the extent that any of those effects are desirable in context with all other segments of the economy, and in that same context, whether there are additional effects that may be considered undesirable over both the short and long terms, as well as how and to what degree any of these effects interact with or counterbalance each other.

No further discussion is possible without first accepting the fact the the housing lobby’s claims, to the extent that they are valid, are clearly contradictory in terms of benefits toward home-buyers or to the economy as a whole. Claiming that the mortgage interest deduction increases the value of homes is an admission that home prices are artificially inflated by a government subsidy. What satisfaction does a homeowner receive knowing that he is paying for not only an artificially inflated principal and real estate commission on his purchase, but also the additional interest that results? Does the buyer realize that the tax benefit derived from taking out a mortgage cannot possibly compensate for the extra costs incurred as a direct result of the benefits?

What are the extra costs of artificially inflated home values? First, the buyer is paying a higher real estate commission, which is a percentage of the inflated sale price. Second, the buyer pays extra interest payments to the lender due to the higher principal. Third, the buyer pays higher property taxes assessed on the inflated property value. Fourth, the homeowner pays higher insurance premiums for the inflated replacement value. Even remodeling costs are inflated, as contractors take into account the inflated increased value of the home after work completion when preparing a bid. All of these entities, not the buyer, are the true beneficiaries of the mortgage interest deduction. The buyer only thinks he is a beneficiary when he sees the large deduction number on his Schedule A. In actuality, the true beneficiary of any form of price support, whether it be a tax deduction such as the mortgage interest deduction, or other type of subsidy, is always the seller, and not the buyer.

Recognizing that the net benefit of the mortgage interest deduction goes to parties other than the buyer, it is absurd to claim that the mortgage interest deduction makes any contribution toward making housing more affordable, especially when the housing lobby argues in the same breath that eliminating or capping the mortgage interest deduction would reduce household wealth by reducing the value of homes. This is patently false for two reasons. First, since subsidies only increase the artificial cost of a commodity, and not its true market value, then the actual effect on household wealth is zero. Second, if removing or reducing an artificiality brings down the purchase cost of a home, then affordability is improved, and the number of participants in the market expands. Why would either of these outcomes not be desirable for anyone except the housing lobby?

There are other harmful effects of price supports (such as the mortgage interest deduction) on the economy as a whole, besides just transferring wealth from one segment (home buyers) to another (lenders, agents, brokers, builders, etc.). Price supports create market distortions. Market distortions cause misallocation of capital from where it is needed to where it isn’t. Misallocation of capital contributes to market bubbles. For bubbles, please see: 2006.

Of course, removing a subsidy, especially a longstanding one affecting millions of consumers and businesses, also has harmful effects, all in the short term. (In the long term, all subsidies are harmful to everyone, because they are not sustainable.) The housing lobby loudly points out these effects. Of course, there is always pain whenever one equilibrium is disturbed for another, but this pain is always preferable to the alternative of allowing the current unstable situation to collapse on its own and uncontrolled, as we saw in 2006.

If the mortgage interest deduction is eliminated, will home prices fall? Initially, yes, as the price of homes adjust to seek their actual market values. Over the longer term, home prices will follow regional market forces as they should, but without the distortion, complexity, ambiguity and uncertainty caused by government policies. Who will be the hardest affected? The more affluent, meaning those with the highest incomes and biggest houses, will be affected more than the rest of the population. (See here.) Low-income people and renters would not be affected at all, and would actually see a net benefit.

What about the millions of middle-class homeowners whose effective monthly payment will increase by the loss of the deduction? There are two simple remedies for these homeowners (who are not homeowners at all but are actually renting from their lender). The first is to initially cap the amount of the deduction and phase out the remainder over a number of years, as was done with the gradual elimination of the consumer interest deduction back in 1986. The second remedy is to reduce the income tax rate so that anyone who took the mortgage interest deduction will not see a tax increase. This remedy will accomplish two things: first, it will transfer the benefit from the lender (and other agents in the housing lobby) back to the homebuyer, and second, it will permit renters to share in the benefit.

Will housing shortages and financial sector weakness occur as a result of elimination of the mortgage interest deduction? Under normal market conditions, when prices fall, inventory decreases until shortages occur, and when shortages occur, prices rise, and when prices rise, more inventory comes on line. (The same forces affect rents.) This kind of market is apparently too flexible and efficient for the the housing lobby’s liking. And as for the financial sector, the less dependent it becomes upon government attempts to manipulate consumer incentives, the healthier it becomes.

Will state and local tax revenues suffer as a result of elimination of the mortgage interest deduction? Tax revenues in a locality rise and fall along with the economic vitality of the locality. Using tax incentives to artificially increase property values for the benefit of the housing and lending industries does nothing for the local economy.

State: John Bolton

Defense: Frank Gaffney

Treasury: Larry Kudlow

Attorney General: Andy McCarthy

Homeland Security: Rudy Giuliani

Agriculture, Interior, Transportation, HHS, Education, Commerce, etc.: Who cares?

Kevein D. Williamson of National Review is a conservative critic of supply-siders, particularly because of their dogmatic anti-tax stance.

His main argument against supply-siders is their apparent acquiesence to their generation’s demand for more government spending on benefits, etc., while opposing any tax increases to pay for them.

His point is fair, but his remedy presents a false choice: either accept a spending cut or a tax increase; don’t make  the next generation pay for the current generation’s wants. But this choice oversimplifies our predicament and ignores the fact that for many spending programs, no amount of tax increase can pay for them without eventually causing the system to collapse.  

His argument is also weak on the fairness standpoint, and is equivalent to saying it’s unfair for your neighbor to take all of the food from your refrigerator without leaving some payment behind. But if it’s an involuntary transaction, leaving a payment does not legitimize it.

One very good way to drive your political opponents batty is to pretend to be hiding something that doesn’t exist. This focuses the most paranoid among them on pointless and nonthreatening issues and away from the issues that could really do political harm.

The problem with this strategy is that there are always rational and intelligent types among your opponents who won’t be distracted by the feint. There are always members of a magician’s audience who are keeping an eye on both hands, not just the one with the coin.

The problem first arises when a portion of a figure’s public bercomes convinced that he is an illusionist, and not what he was portrayed to be. At this point, every maneuver or pronouncement, even the most routine or innocuous, becomes suspect.

If the politician is smart, he will counter the unbelievers by pretending to create an illusion where one does not exist, thereby teasing the skepticism of the skeptics while at the same time reinforcing the faith of the believers.

Obama’s birth certificate is just such an example.

American English makes heavy use of metaphors, and I think the three most common are baseball, guns, and gambling.

Baseball: home run, step up to the plate, three strikes, struck out, triple play, grand slam, line drive, throw a curve, get to first base, pinch hit, on deck, lead off, balk.

Guns: bull’s eye, take aim, bullet, pistol, lock and load, fully loaded, reload, quick draw, take a shot, shot in the dark, jump the gun, firing blindly, half-cocked, trigger, pull the trigger, both barrels, shooting oneself in the foot, shooting blanks.

Gambling: [you can come up with your own, but you get the idea. Hint: start with poker]

The point is that metaphors are a colorful part of our language and any attempt to assign any nefarious meaning to their use is just silly.

1935 – Social security becomes a permanent, lifetime entitlement
1935 – Welfare (ADC/AFDC/TANF) becomes a permanent, lifetime entitlement
1965 – Medicare becomes a permanent, lifetime entilement
March, 2010 – Health insurance becomes a permanent, lifetime entitlement
December, 2010 – Unemployment benefits become a permanent, lifetime entitlement

1. Reform education. The film “Waiting for Superman” featured a number of liberals (yes, liberals) who had some good ideas on education reform. If these ideas had originated from conservatives, they would never be taken seriously by the education establishment. But conservatives can support them if they don’t mind allowing liberals to take the credit.

2. Liberalize trade. Clinton liberalized trade. Bush protected the steel industry, and though he did support new free trade agreements, he didn’t demonstrate an understanding of the benefits of free trade. The only people on the right who are trade protectionists are the wingnut nationalists, and their allies on the left are union thugs. Everyone else is normal.

3. End farm subsidies. Giving billions in subsidies to big agribusiness is nuts. Don’t go on about the “family farm.”

4. End corporate welfare. Think about it: without corporate welfare, most lobbyists would be out of work. With fewer lobbyists, there would be less campaign finance corruption, and less corruption overall. Then without subsidies, tax loopholes, tax credits, anti-competitive regulations, set-asides and other forms of corporate welfare, we can get down to cutting business taxes for all of them.

If old-school Euro-Judenhass derived from racism and nationalism, the new Judenhass has advanced under the cover of anti-racism and multiculturalism. The oldest hatred didn’t get that way without an ability to adapt. – Mark Steyn

“I tend to think that the charge of hypocrisy in political discourse carries more weight than it rightfully should (a man’s convictions should be assessed independently of whether he has the courage of them). But in instances … where a man who has a robust predilection for raising our taxes is caught apparently engaging in behavior to avoid paying his own, a little bit of righteous indignation is in order.”

-Daniel Foster

We always slow down at crosswalks, and exercise extra vigilance for pedestrians there. We love crosswalks, not only because we depend on them ourselves on occasion, but also because we hate jaywalkers, and believe that the existence of crosswalks reduces their number.

If crosswalks did not exist, it would be impossible to cross the street without jaywalking. This would impede the flow of traffic, both vehicular and pedestrian, as well as result in injuries and deaths. We have been to many cities where such a situation is prevalent, and we do not find it acceptable.

Jaywalkers are the enemies of pedestrians. They exacerbate the conflict between vehicular and pedestrian traffic. If jaywalkers did not exist, there would be no conflict, and fewer injuries.

Jaywalkers and pedestrians who use crosswalks lawfully are not the same class of people. Although they both have the same objective (getting to the other side of the street), their methods of achieving that objective separate them in a fundamental way.

Similarly, a person who cuts into a queue at a ticket window is a different class of person from one who arrived earlier and waited patiently. To classify both both types under their common trait (patrons) unfairly and misleadingly ignores the more important distinction between them.

If all of this seems logical, why is such logic ignored when applied to the matter of immigration?