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House bias: The economic consequences of subsidizing homeownership
Federal Reserve Bank of Richmond ^ | Fall 2008 | Stephen Slivinski

Posted on 01/10/2009 11:19:21 AM PST by curiosity

Ask most people in America today whether buying a home is better than renting one, and you’ll likely get a response that equates renting with stuffing money down a garbage disposal. The idea of homeownership today is not one that simply evokes the comfort or pride of living in a place of one’s own. Instead, it’s become part of a common investment philosophy.

But if you ask Edmund Phelps, the Nobel Prize-winning economist from Columbia University, he’ll proudly declare that he doesn’t own a home. And to him, that’s not a bad thing. “It used to be that the business of America was business,” said Phelps in August 2008 to Bloomberg News. “Now the business of America is homeownership.” In fact, many economists will tell you that the American love affair with homeownership has some consequences that you won’t normally hear discussed.

(Excerpt) Read more at richmondfed.org ...


TOPICS: Business/Economy; Culture/Society; Government; Philosophy
KEYWORDS: fanniemae; financialcrisis; freddiemac; gses; homeownership; subsidies
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An excellent article detailing the adverse unintended consequences of the US government policy to subsidize home ownership. And yes, the mortgage interest deduction, along with Fannie Mae and Freddie Mac, is one of these subsidies that ought to be eliminated.
1 posted on 01/10/2009 11:19:22 AM PST by curiosity
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To: rabscuttle385

An article to consider for your ping list.


2 posted on 01/10/2009 11:25:42 AM PST by curiosity
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To: curiosity

Actually my nephew does not own a home, and he has enough money to buy a few dozen. Does not want to be tied down and likes to travel.


3 posted on 01/10/2009 11:27:02 AM PST by org.whodat (Conservatives don't vote for Bailouts for Super-Rich Bankers! Republicans do!)
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To: curiosity

Actually, what’s needed is to stop using employers as collection agents for the IRS. If every wage earner paid their own taxes quarterly, things would sort themselves out within six months.


4 posted on 01/10/2009 11:30:46 AM PST by abb ("What ISN'T in the news is often more important than what IS." Ed Biersmith, 1942 -)
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To: curiosity
And yes, the mortgage interest deduction, along with Fannie Mae and Freddie Mac, is one of these subsidies that ought to be eliminated.

Fine, as long as the county knocks off about 75% of the amount I'm paying for property tax at the same time.

5 posted on 01/10/2009 11:32:50 AM PST by skeeter
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To: curiosity

6 posted on 01/10/2009 11:33:09 AM PST by HangnJudge
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To: curiosity
governmnet subsidizing home ownership

Hmmmm. Let's see. I get about a $4000 net reduction in my combined State and Federal income taxes. And I get to pay $12,000+ in local taxes too.

ML/NJ

7 posted on 01/10/2009 11:33:46 AM PST by ml/nj
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To: curiosity

Buy Spam while it is still available.


8 posted on 01/10/2009 11:33:46 AM PST by screaminsunshine (.)
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To: abb

I think it would take 9 months...


9 posted on 01/10/2009 11:36:19 AM PST by Cyber Ninja (His legacy is a stain OnTheDress)
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To: ml/nj
I agree with you that any elimination of deductions would have to be revenue neutral, i.e. it would have to be offset by a reduction in marginal rates.

Last time I checked, were against using the tax code for social engineering purposes.

10 posted on 01/10/2009 11:36:27 AM PST by curiosity
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To: skeeter
Fine, as long as the county knocks off about 75% of the amount I'm paying for property tax at the same time.

Renters and homeowners both pay property taxes. The difference is that renters pay it indirectly: their landlord pays it, and then passes on to the renter in the form of higher rents.

Only the homeowner is getting a subsidy from the mortgage interest deduction.

11 posted on 01/10/2009 11:37:38 AM PST by curiosity
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To: curiosity
Renters and homeowners both pay property taxes.

Yeah, sure. But how much? And I guess I pay property taxes when I go to McDonalds too, right? And the landlord pays nothing.

ML/NJ

12 posted on 01/10/2009 11:43:23 AM PST by ml/nj
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To: ml/nj
Yeah, sure. But how much? And I guess I pay property taxes when I go to McDonalds too, right?

Indirectly, yes.

And the landlord pays nothing.

Property taxes to a landlord are a cost of doing business. Landloards are in the business of making money. If their rents can't at the very least cover their costs, then they are not going to stay in business for very long.

13 posted on 01/10/2009 11:53:32 AM PST by curiosity
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To: curiosity
These economists seem very naive to me.

They claim that we are over-invested in housing because of high home-ownership vs renting. However, if more people were renting instead of owning their own home, there would have to be more landlords who would be investing in more rental property. Same difference.....

14 posted on 01/10/2009 12:00:53 PM PST by expatpat
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To: expatpat
They claim that we are over-invested in housing because of high home-ownership vs renting.

Go read the article again. That is not their argument.

15 posted on 01/10/2009 12:01:58 PM PST by curiosity
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To: curiosity

One thing that these articles do not treat is the capital gains, and other taxes assessed on real estate transfers and holdings. Investors in other capital assets can deduct interest paid to support those investments, and generally have virtually no tax cost of ownership - it is only reasonable that home owners have equal rights with respect to real estate capital investment. Suppose states and municipalities were to impose transfer and “property” (ownership) taxes on capital assets held, instead of just on real estate. Great hue and cry from the wealthy, I would think.


16 posted on 01/10/2009 12:04:31 PM PST by GregoryFul
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To: curiosity
Renters and homeowners both pay property taxes. The difference is that renters pay it indirectly: their landlord pays it, and then passes on to the renter in the form of higher rents.

Only the homeowner is getting a subsidy from the mortgage interest deduction.

Taxes upon home ownership are calculated into rents as a cost, but tax sheltering effects of home ownership are not calculated into rents as a reduction in cost?

I take it you're not an accountant.

17 posted on 01/10/2009 12:04:41 PM PST by RegulatorCountry
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To: curiosity
So, in your view, businesses have no expenses?

ML/NJ

18 posted on 01/10/2009 12:06:56 PM PST by ml/nj
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To: RegulatorCountry
Taxes upon home ownership are calculated into rents as a cost, but tax sheltering effects of home ownership are not calculated into rents as a reduction in cost?

Yes, but a landloard has to pay taxes on his rental income.

A residential owner pays no taxes on the amount he saves in rent.

19 posted on 01/10/2009 12:13:39 PM PST by curiosity
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To: ml/nj
So, in your view, businesses have no expenses?

Of course they have expenses, and property taxes are among them. What's your point?

20 posted on 01/10/2009 12:14:22 PM PST by curiosity
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To: GregoryFul
One thing that these articles do not treat is the capital gains, and other taxes assessed on real estate transfers and holdings. Investors in other capital assets can deduct interest paid to support those investments, and generally have virtually no tax cost of ownership - it is only reasonable that home owners have equal rights with respect to real estate capital investment.

Homeowners have more than fair tax treatment since they do not pay taxes on the money they save in rent, which is a form of income ignored by the IRS. Real estate investment capital has to pay taxes on all its rental income. So even if you eliminate the mortgage interest deduction, home owners come out ahead.

21 posted on 01/10/2009 12:17:33 PM PST by curiosity
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To: abb

My husband and I have a dentist friend. Once a year or so he hands his employees all their earnings in a big wad of cash. This includes the employers contribution to social security.

He lays out trays labeled:

Federal income tax withholding.
Sate income tax withholding
Social security PLUS the employers contribution
Workman’s compensation.
Medicare.
Unemployment insurance.

His employees nearly go into shock as they pay these various taxes and expenses from their own cash.

All employers should do this on the pay day before election.


22 posted on 01/10/2009 12:45:34 PM PST by wintertime (Good ideas win! Why? Because people are NOT stupid)
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To: ml/nj; curiosity
Yeah, sure. But how much? And I guess I pay property taxes when I go to McDonalds too, right? And the landlord pays nothing.
^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

Everyone pays property taxes on everything they buy, use, and consume.

Renters pay property tax because their rent covers the cost of the tax plus a profit for the landlord.

Your Mc Donals hamburger is priced high enough to pay for the property tax costs of the building and equipment.

So?....I suppose you could say that businesses do not pay property tax because ultimately the tax is passed to the consumer who pays the tax in the form of higher prices.

Taxing businesses is a **really** SNEAKY way to ultimately tax the people. It is so hidden by the extra money the consumer has to pay out is very real.

23 posted on 01/10/2009 12:53:05 PM PST by wintertime (Good ideas win! Why? Because people are NOT stupid)
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To: curiosity
Yes, but a landloard has to pay taxes on his rental income.

... which is also considered in calculating rents, by any sane owner of rental properties. Cost is cost. Net is what is remains afterwards.

24 posted on 01/10/2009 12:54:36 PM PST by RegulatorCountry
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To: RegulatorCountry
which is also considered in calculating rents, by any sane owner of rental properties. Cost is cost. Net is what is remains afterwards.

I agree. What's your point?

25 posted on 01/10/2009 12:56:45 PM PST by curiosity
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To: wintertime

Beardsley Ruml: This man that no one knows has had more impact on tax policy, federal spending and wage earners than any other man in American History.

http://www.timesgazette.com/main.asp?SectionID=1&SubSectionID=1&ArticleID=137314
Taxpayers should know Beardsley Ruml


26 posted on 01/10/2009 12:56:55 PM PST by abb ("What ISN'T in the news is often more important than what IS." Ed Biersmith, 1942 -)
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To: curiosity
Renters and homeowners both pay property taxes.

Incorrect. Property owners, because they receive a property tax bill in the mail, pay property taxes. Renters don't pay property taxes, because they don't receive a property tax bill.

27 posted on 01/10/2009 12:59:49 PM PST by Isabel C.
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To: curiosity

Renters indirectly pay associated costs of home ownership, and renters benefit indirectly from associated tax benefits of home ownership. The purpose of owning rental properties is to profit. Anything that increases the cost of owning rental properties is going to affect rents. Anything that decreases the cost of rental properties is going to affect rents. Renters pay for the privilege of being unencumbered, or pay a penalty for being unable to qualify. Remove the interest deduction, and the direct cost of shelter will increase, for everyone, renter and owner alike.

That is my point.


28 posted on 01/10/2009 1:06:07 PM PST by RegulatorCountry
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To: abb

thank you for the link.


29 posted on 01/10/2009 1:10:21 PM PST by wintertime (Good ideas win! Why? Because people are NOT stupid)
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To: wintertime
The whole issue of taxing businesses is somewhat confusing, and purposefully so. I would agree that taxes are to some extent borne by customers, but to some extent they are also borne by shareholders. It is the shareholders, or their representatives, who may lobby against the tax(es) or for their reduction; or their imposition on competitors! Usually the consumers have little voice, and sometimes are allowed NO voice (as in the case of hotel "occupancy" taxes in other states) in legislation regarding these taxes.

ML/NJ

30 posted on 01/10/2009 1:11:39 PM PST by ml/nj
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To: ml/nj

One of the tactics of Organized Government (as is seen here on this thread) is to get us taxpayers fighting amongst ourselves over what should and shouldn’t be taxed at at what rates. It diverts us from what should be our main goal:

Reduction of ALL taxes at ALL levels of government, which will reduce the size of government and limit its power.


31 posted on 01/10/2009 1:22:38 PM PST by abb ("What ISN'T in the news is often more important than what IS." Ed Biersmith, 1942 -)
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To: abb
Amen.

ML/NJ

32 posted on 01/10/2009 1:26:04 PM PST by ml/nj
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To: RegulatorCountry
Removing the mortgage interest deduction from person income taxes would not remove the deduction from business taxes.

Landlords would still be able to deduct their mortgage interest because it is a business expense.

As a result, the cost of renting would not change, and the subsidy for homeownership would be removed.

33 posted on 01/10/2009 1:51:26 PM PST by curiosity
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To: curiosity
As a result, the cost of renting would not change, and the subsidy for homeownership would be removed.

So, you're in favor of removing tax favorable treatment for individual, primary residences, but continuing with deduction for rental properties?

Why would a government want to do that? It's destabilizing.

34 posted on 01/10/2009 1:57:18 PM PST by RegulatorCountry
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To: curiosity

Many renters benefit from the interest deduction as well. I agree with you, though.


35 posted on 01/10/2009 1:58:59 PM PST by rb22982
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To: abb
I agree. That is why any taxes we do have need to be as flat as possible, with as few deductions as possible, so that the rates can be as low as possible.

The fewer deductions you allow, the lower the rates can be.

That is why anyone who defends the personal mortgage interest deduction (or any other personal income tax deduction) is no fiscal conservative.

36 posted on 01/10/2009 2:03:03 PM PST by curiosity
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To: RegulatorCountry
So, you're in favor of removing tax favorable treatment for individual, primary residences, but continuing with deduction for rental properties?

Yes, because in the case of rental properties, interest is a business expense that is netted out against rental income. In the case of an owner-occupied residence, it is not.

Why would a government want to do that? It's destabilizing.

You've got it exactly backwards. The current regime subsidizes owner-occupied residency over rental residency. Removing it would elminate this distortion.

37 posted on 01/10/2009 2:05:35 PM PST by curiosity
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To: rb22982
Many renters benefit from the interest deduction as well.

How so?

38 posted on 01/10/2009 2:06:42 PM PST by curiosity
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To: curiosity

If you advocate creating a nation consisting largely of landless renters, and want to increase taxes to do it, you are no conservative. I personally think only property owners should be allowed to vote, especially regarding bond issues that increase property tax assessments.


39 posted on 01/10/2009 2:12:01 PM PST by RegulatorCountry
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To: curiosity
That is why anyone who defends the personal mortgage interest deduction (or any other personal income tax deduction) is no fiscal conservative.

To the extent that the total tax take from the citizens to Organized Government should be reduced, I agree with you. In other words, if Organized Government gives up other taxes seized, I would agree the mortgage deduction might be scrapped. But I'm not in favor of unilateral disarmament.

The total amount of taxes seized from productive citizens should be reduced. Period.

40 posted on 01/10/2009 2:12:14 PM PST by abb ("What ISN'T in the news is often more important than what IS." Ed Biersmith, 1942 -)
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To: RegulatorCountry
If you advocate creating a nation consisting largely of landless renters, and want to increase taxes to do it

No, all I favor is a tax code does not favor one type of residence over another. Like all fiscal conservatives, I believe people should make their decision on whether to rent to own based on economics, not on which type of residence is more tax friendly to them.

I personally think only property owners should be allowed to vote,

LOL. Good luck with that. Too bad for you it's not the 18th century any more.

especially regarding bond issues that increase property tax assessments.

Sigh. As I have to point out for the 100th time, landlords pass on property tax hikes to their tenants by increasing their rents, so renters have the same incentives to vote against property tax hikes as owners.

Perhaps many renters don't realize this since they are taxed only indirectly. There's an easy remedy: local governments can make property tax like the sales tax and have landlords list it a seperate line item on the rental bill.

41 posted on 01/10/2009 2:20:26 PM PST by curiosity
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To: abb
To the extent that the total tax take from the citizens to Organized Government should be reduced, I agree with you. In other words, if Organized Government gives up other taxes seized, I would agree the mortgage deduction might be scrapped.But I'm not in favor of unilateral disarmament.

Yes, we're in agreement. Any deductions that are eliminated need to be combined with reductions in marginal rates. Otherwise, no sale.

42 posted on 01/10/2009 2:22:03 PM PST by curiosity
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To: curiosity

One other thought. Yes, the mortgage interest deduction skews financial behavior toward an outcome that otherwise would not occur. But then, the entire tax code does that. There are many other deductions, credits, etc that should be scrapped before even talking about the MID.

Personally, I think if employers no longer served as IRS collection agents and individuals wrote the check, all other tax issues would fade into the background. There would be a tax revolt of staggering magnitude.

It would be glorious.


43 posted on 01/10/2009 2:25:02 PM PST by abb ("What ISN'T in the news is often more important than what IS." Ed Biersmith, 1942 -)
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To: curiosity

I see you are an economics professor. Good. Here’s a paper written ten years ago that tells you all you need to know about withholding.

http://www.cato.org/pubs/journal/cj14n3-1.html
EVOLUTION OF FEDERAL INCOME TAX WITHHOLDING: THE MACHINERY OF INSTITUTIONAL CHANGE

Charlotte Twight


44 posted on 01/10/2009 2:31:26 PM PST by abb ("What ISN'T in the news is often more important than what IS." Ed Biersmith, 1942 -)
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To: abb
Yes, the mortgage interest deduction skews financial behavior toward an outcome that otherwise would not occur. But then, the entire tax code does that. There are many other deductions, credits, etc that should be scrapped before even talking about the MID.

I agree that there are many other credits and deductions that should be scrapped, but I don't think that any of these others has nearly as big an adverse impact as the mortgage interest deduction. All the others dwarf the MID both in terms of overall magnitude as well as in terms of the number of people who take it.

45 posted on 01/10/2009 2:37:32 PM PST by curiosity
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To: abb
Interesting. Thanks for the link. I will read it.
46 posted on 01/10/2009 2:39:22 PM PST by curiosity
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To: curiosity

You are very wrong. Read the section “Downsides of Home Ownership” on p 14.


47 posted on 01/10/2009 3:03:44 PM PST by expatpat
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To: expatpat
You are very wrong. Read the section “Downsides of Home Ownership” on p 14.

I did. It does not make the argument you say they are making. From your previous post:

They claim that we are over-invested in housing because of high home-ownership vs renting

You got the conclusion right: we are indeed overinvesting in housing. You got the argument wrong: it is not because of high home-ownership rates relative to renting.

Since you seem incapable of reading the article for yourself, let me lay it out for you. The author argues that the reason we overinvest in housing is because the tax code gives preferential treatment to investment in owner occupied housing relative to other types of investment. Because of this tax distortion, people have an incentive to buy bigger houses with more bells and whistles than they would otherwise buy. Investing more in housing, in turn, means less investment in other capital goods.

48 posted on 01/10/2009 3:13:10 PM PST by curiosity
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To: curiosity
Because of this tax distortion, people have an incentive to buy bigger houses with more bells and whistles than they would otherwise buy.

Partially true, I would argue. Large, flashy houses have throughout history been built to impress others or as a sign of prosperity. Successful businessmen (Vanderbilt, Morgan, Rockefeller) did this before there was an interest deduction or even an income tax. No doubt many people tried to imitate that behavior - to "keep up with the Joneses." Cars are the same way. People want to show off.

I call it the SWIG factor. See What I Got.

49 posted on 01/10/2009 3:23:20 PM PST by abb ("What ISN'T in the news is often more important than what IS." Ed Biersmith, 1942 -)
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To: expatpat
Oh, and another thing: the average investment required to build a unit of rental housing is smaller than that required to buy a unit of owner-occupied housing. So even if the effect of the tax deduduction were merely to shift people into owner-occupied housing, it would still cause overinvestment in housing.

However, as I noted before, the tax deduction also gives people who are going to buy anyway an incentive to buy more house than they otherwise would, and as noted in the article, this second effect turns out to be much stronger.

50 posted on 01/10/2009 3:31:49 PM PST by curiosity
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