Kill the mortgage deduction and give it to entrepreneursBy John F. Wasik (Reuters)
This is a subject I discussed in my book The Cul-de-Sac Syndrome, which is now in paperback and ebook.
Somehow I don’t think President Obama had the home-mortgage interest deduction in mind when he mentioned the U.S. tax code before the U.S. Chamber of Commerce this week.
Yet winding down and eliminating this write-off for homes would be good for business. It’s unfair, doing nothing to revive the housing market and can be put to better use shifting it to entrepreneurs to create jobs.
Most of the job creation in the U.S. economy comes from small businesses, which typically have no public shareholders to sate and are not primarily interested in fattening pay packages of overpaid executives.
The home mortgage deduction needs to go because it doesn’t make housing less expensive, either. If anything, it makes homes more expensive because the subsidy inflates prices. Most homebuyers don’t even itemize to take advantage of it. Nixing it would make homes more affordable.
As Alan Mallach, senior fellow at the Center for Community Progress, wrote in this space: “It is one of the most regressive parts of the tax code, since it affects all house prices, including the price of houses bought by lower-income home buyers, who rarely itemize and get little benefit from the deduction.”
Mallach cites one study found that “barely 10 percent of homeowners earning less than $30,000 take the deduction, but they pay higher prices for their homes to benefit more well-off homeowners. On top if this, it is projected to add $120 billion to the federal deficit next year.”
Will getting rid of the write-off deep-six the already flagging U.S. home market? Mallach noted that Italy pared its residential housing deduction in 1992 and maintains a higher home ownership rate than the U.S.
Why give a break to entrepreneurs? Won’t they squander it? True, many businesses won’t make it out of start-up mode, but those that become profitable become employment engines. Small and medium-sized enterprises account for 60 to 70 percent of most jobs in industrialized countries. Why not give those that are struggling to survive a tax break if they can create more employment?
According to Robert Litan of the Kauffman Foundation in Kansas City, between 1980 and 2005, nearly all U.S. net job creation was produced by small firms.
When President Obama exhorted corporations to spend the “$2 trillion sitting on their balance sheets” to bring down the 9-percent unemployment rate, he was preaching to a tone-deaf choir. Although they wanted to hear that the corporate income tax would be reduced — and that message was delivered — he should have talked about how he was going to help small and medium-sized businesses.
Big public corporations have long relied upon anti-social incentives when it comes to employment. They can fatten their bottom lines when they lay off people, cut benefits, take over other companies and sit on cash. The market often rewards them for doing so and executive stock options go up in value.
The White House should be studying what Singapore, Hong Kong and New Zealand are up to, which were rated as the three best places for the “ease of doing business” by the World Bank. And instead of talking before the mega-corporate club of the U.S. Chamber of Commerce, he should talk to some innovative entrepreneurs around the country.
A more socially responsible tax code needs to reward people for productive activity. Giving Americans a huge break to buy an overpriced home has already gotten millions into trouble. It’s the one part of the American Dream that has turned into a nightmare.