Felix Salmon at Reuters agrees with me, which is great because he carries much more gravitas. He also reframes the problem as being more about our tax code’s treatment of debt overall. Our tax code favors debt to equity, which encourages homeowners and businesses to leverage their investments. This increases profits in the short-term while making worse the impact of negative events, making our economy and personal lives more fragile. Here’s how Salmon would gradually ween us from our debt addiction:
Maybe the thing to do is to phase this in gently: start by allowing the tax-deductibility of only say 90% of interest payments, and then bring that number slowly down to zero over time. And of course include mortgage-interest payments in the overall bill. Fiscal conservatives would love it, since it would raise billions of new dollars, while at the same time reducing overall systemic risk — which is always highly correlated with overall systemic leverage. Let’s give it a go!
As for the mortgage-interest deduction specifically, the best way I’ve found to explain that it makes sense to abolish it is to point out that only 20% of American households itemize their deductions on their tax returns, while about 65% of American households own their own homes. This clearly isn’t something which helps most homeowners: it basically just helps homeowners in very expensive houses in New York and California.
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