Good columnists do more than offer short-term political and policy advice. Every now and then, they look at a political problem and ask whether, maybe, we should be thinking about it in a completely different way. Today Paul Krugman does that in his New York Times column. As he notes, just about everybody, whether Republican or Democrat, agrees with the proposition that we should increase homeownership. But is it a given that homeownership is really good for everybody? He then proceeds to note some of the potential disadvantages: It's a financial risk, it ties workers to one place, and it spawns more commuting.
I confess I haven't thought through the obvious or not-so-obvious rejoinders here. (Readers, feel free to chime in.) But it's certainly worth pondering the actual virtues of at least one policy linked to homeownership--the mortgage interest deduction, which subsidizes McMansions (not to mention mansions of the non-Mc variety) while public housing programs like Hope VI and Section 8 vouchers languish for funds.
Two years ago, Roger Lowenstein addressed this very issue in the New York Times Magazine. Here's what he decided:
Economists don't agree on much, but they do agree on this: the interest deduction doesn't do a thing for homeownership rates. If you eliminated the deduction tomorrow, America would have the same number of homeowners, the same social networks, the same number of gardens.
The deduction might help some people (like me) to purchase bigger homes than they otherwise would. And it certainly helps people who are selling mansions to get a higher price. But it is hardly the democratic subsidy people think. In fact, it's patently regressive.
More than 70 percent of tax filers don't get any benefit from the deduction at all. O.K., many of them are renters. But even among homeowners, only about half claim the deduction. And for the 37 million individuals and couples who do, the rewards, at least on average, are surprisingly modest — just under $2,000 per return. (Figure it like this: the median home, as computed by the Bureau of the Census in 2003, is valued at $140,000. If you finance 80 percent of it with a 6 percent mortgage, your interest bill is $6,720 a year. A taxpayer in the 25 percent bracket would save one quarter, or $1,680.)
But cumulatively, the deduction is a big deal. This year, it is expected to cost the Treasury $76 billion. And the rewards are greatly skewed in favor of the moderately to the conspicuously rich. On a million-dollar mortgage (the people with those really need help, right?), the tax benefit is worth approximately $21,000 a year. And according to the Joint Committee on Taxation, a little over half of the benefit is taken by just 12 percent of taxpayers, or those with incomes of $100,000 or more.
That's a lot of money for a deduction that doesn't seem to achieve much in terms of policy goals. And if outright repeal is not politically viable, why not at least cap it? Does the government need to give homeowners a bigger tax break because they spend $800,000 rather than $400,000? (I know, there are regional variations. So, fine, adjust the cap regionally.)
President Bush's tax commission actually recommended such a step. It didn't go anywhere--those realtors are powerful!--but it earned praise from even some harsh administration critics, including Robert Reich. (Also among those who have called for reducing or ending the deduction over the years is Slate's Timothy Noah.) And while political circumstnaces might seem to make such a move impossible at this particular moment the idea of reforming the deduction actually got new life last year when Representatiave John Dingell came forward with (what I think is) a new twist on the idea: Limiting the deduction by house size, for the sake of better environmental policy.