Deficit Reduction Plan Is Realistic - Economic View - NYTimes.com

One of the idiotic subsidies that just has to go is the mortgage interest deduction. It used to be that all interest was deductible for personal income tax calculations but this deduction was partially taken away leaving just the mortgage interest. As this economist points out....

One major tax expenditure that the Bowles-Simpson plan would curtail or eliminate is the mortgage interest deduction. Without doubt, many homeowners and the real estate industry will object. But they won’t have the merits on their side.

This subsidy to homeownership is neither economically efficient nor particularly equitable. Economists have long pointed out that tax subsidies to housing, together with the high taxes on corporations, cause too much of the economy’s capital stock to be tied up in residential structures and too little in corporate capital. This misallocation of resources results in lower productivity and reduced real wages.

Moreover, there is nothing particularly ignoble about renting that deserves the scorn of the tax code. But let’s face it: subsidizing homeowners is the same as penalizing renters. In the end, someone has to pick up the tab.

Any time you subsidize something, you get more of it. But this means that people engaging in this economic activity change their behavior and this diverts resources away from other uses. So, you get more housing but at the cost of other goods and services. Eventually, this subsidy is arbitraged away and this leads to higher prices, more debt and potentially more volatility of prices as we have seen since 2007.

Deficit Reduction Plan Is Realistic - Economic View - NYTimes.com