Louis' Ramblings

Economic Rant (part 2)

Before I go into this I would like to note two things. First I realize some of things I say would cause immediate and significant disturbances in revenue and taxes for people. I am not advocating immediate changes, just noting when things do not make sense. Second, I realize some of my points are not really well backed up. Its because this is all very inter-tangled. At some point in the future I intend to go through, edit everything, and hyperlink it all together.

The Mortgage deduction is a load of shit. Its serves two purposes. One is to encourage the concept of home ownership. Its not actually clear to me that home ownership is really a "good thing" in the general case. I am not saying there aren't benefits. What I am saying is that for many people renting makes more sense, and giving a tax incentive just entices people to try to buy a house when they really shouldn't. Second, its a token deduction for middle class Americans. It makes them think they are getting an advantage, that they are higher up on the scale than they are. It is one of the only major deduction most middle class American's can get.

Okay, so lets look at why buying a home often doesn't make sense. Housing serves two purposes. One is to provide shelter. Renting also serves that purpose. Two it allows someone to invest in the real-estate growth of an area. But houses are a very complicated investment tool. Most people have to struggle to come up with the down payment, which means they are very leveraged investment tool.

By comparison, in the stock market the standard leverage tools people use are margin accounts and options trading. Margin accounts are very safe for lender, they are secured by the investor's other stocks. Its very hard to "go upside down" on margin accounts (owe more than the intrinsic value of the current assets you hold). Most brokerages will start selling your stocks for you when you start approaching that point. Options trading allows for relatively unsecured transactions. If you have ever setup an options trading account that allows you to do perform uncovered shorts or more risky options strategies you know the pages and pages of disclosures you need to go through. Its risky, you can make a lot of money, but you can lose your shirt. Despite what people say, housing is not guaranteed to go up. And if you want to invest in Real-estate you can always buy REITs. The returns may not be as good as home appreciation, but they are tremendously more liquid, and they are not leveraged, so your investment can never go upside down.

Now housing may not be as dangerous as options trading, but most options traders have significant assets and place a small portion of their money into this highly leveraged mechanism. Many new homeowners put almost all of their assets into a highly leveraged situation. Now call me crazy, but it seems very strange to me to give a tax incentive for that.

The second kind of freaky thing about the tax credit is it purely encourages people to buy homes. It only allows you to deduct the interest. The part that your "throwing away." It seems to me people should be allowed to deduct rent. That would help the poor who can't afford to buy, as well as get rid of the incentive to do what can be a fairly risky investment. Of course, if your going to allow people to deduct both mortgage interest and rent you might as well just get rid of the mortgage deduction and somehow lower taxes on people below a certain income bracket (either through rate reductions, or better yet, payroll tax reductions).