Wednesday, June 15, 2011

There is no joy in Mudville - Casey Mulligan has struck out

Thanks again to a link in the Tax Prof Blog, I see that Casey Mulligan of the University of Chicago Econ Department is saying that the home mortgage interest deduction is no big deal, hence no particular reason to repeal it. He focuses mainly on the point that "one person’s mortgage interest payment produces interest income for another person or a business. The lender may well owe taxes on the interest income."

My god, but Mulligan has missed the boat on this one. William Turnier pretty much makes the point, back in the Tax Prof blog link, by referencing the Haig-Simons definition of income and calling the home mortgage interest payment consumption-related.

But I would make it a bit clearer still. The problem isn't really the home mortgage interest deduction as such, although it may encourage the sort of excessive home leverage that helped contribute to the 2008 financial crisis. The real problem is the fact that homeowners get to exclude imputed rental income because it isn't derived from an observable market transaction. The home mortgage interest deduction merely builds off that. Its allowance would be uncontroversial if imputed rental income were included.

One can't seriously discuss the home mortgage interest deduction without understanding its relationship to the underlying imputed rent exclusion. This is really basic stuff. Mulligan ought to know, not just before he blogs about the issue in the New York Times, but as a supposedly informed professional in the field of public economics.

He further embarrasses himself by adding the following: "In contrast, consumer durable goods do not enjoy the interest deductions that housing and business capital do. Someone who takes out a car loan to purchase a personal automobile cannot deduct the interest payments from her taxable income, even while the Internal Revenue Service may be collecting taxes on the interest income of the lender. In this regard, tax policy discourages investment in consumer durable goods relative to investment in housing and businesses."

Mulligan apparently is unaware that the personal use of a car generates an economic return that the tax system excludes from income, whereas returns to business investment are at least in principle taxed. Again, this is really elementary stuff. Anyone who purports to do public economics and to have opinions about the tax system ought to know it.

The University of Chicago Law School has a pretty good tax faculty, whose members I am sure would have been happy to bring Mulligan up to speed. But if you don't know that you don't know, I guess it's hard to find out.

1 comment:

Dad said...

"One can't seriously discuss the home mortgage interest deduction without understanding its relationship to the underlying imputed rent exclusion. This is really basic stuff. Mulligan ought to know, not just before he blogs about the issue in the New York Times, but as a supposedly informed professional in the field of public economics."

It seems to me that we get a clearer picture (for both economic and tax purposes) is we separate the costs of ownership from the costs of financing that ownership.

Isn't the home mortgage deduction equivalent to the mortgage interest expense on the rental property?

And, if the owner of the rental property gets to deduct maintenance expenses but the homeowner does not, isn't the tax effect simply on the owner's profit from the rental?

In other words, when considering tax impacts that we try to measure using imputed rental value, shouldn't we be looking at the imputed profit of actual ownership? (based on very reasonable expectation that, over time, maintenance costs are less than rental costs.)

It seems to me that we get a clearer picture (for both economic and tax purposes) is we separate the costs of ownership from the costs of financing that ownership.