THE WEATHER is getting nicer and the plants are starting to bloom. This can only mean two things: Miniskirts are coming out and April 15th is just around the corner. While this might whet Commerce students' appetites, it means thousands of dollars in taxes for most adults. With so many people wasting hours filling out forms in order to give up their hard-earned income, it's high time for Congress to reconsider some of the provisions in the U.S. tax code. Right now the tax regime astonishingly encourages debt. This perverse attitude has prevailed because of the tax code's unnecessary complexity and the special interests it has created.
The old American dream still lingers in many people's mind: a nice house with a white picket fence. The lure of this ideal drove Congress in 1920 to make interest payments for mortgages tax-deductible. The logic was simple: Make it easier to get a home loan and more people will be able to afford to buy a house. True to form, Congress failed to think through the long-term consequences of its actions. It led to what some economists have termed the "fetishization" of home ownership. In other words, it encourages many Americans to buy homes they cannot really afford when they ought to be renting. Furthermore, it lets the rich shirk their tax burdens by simply buying McMansions.
As it currently stands, if you own a house and you actually live in it, then you don't have to a pay a cent in taxes on the interest for your mortgage. So if you're making six figures, the tax code is practically begging you to buy a gigantic house, put down as little as possible, and then take a huge mortgage. The more debt you have, the less you owe. Furthermore, once you've paid down a bit of your mortgage, the super low interest rates of the past decade (real interest rates were actually negative for most of the 1990s) make home equity loans tantalizing. The upshot of all these unintended consequences of Congress' actions is that millions of middle-class Americans own homes they can't really afford. Even worse, they have taken massive loans against the equity in these estates enabling them to live lifestyle they can't afford. Not exactly a stable situation.
The party had to end once interest rates started rising. With the energy market a complete mess thanks to the combination of OPEC's flawed policies and Iran's antics, it should be no surprise that prices started to rise in the United States. Carefully guarding his inflation-fighting credentials, Chairman of the Federal Reserve Ben Bernanke slowly raised interest rates. All of a sudden, there were massive defaults on subprime mortgages -- home loans to those with bad or no credit. In fact this "froth" in the housing market led former Fed Chairman Alan Greenspan to put the odds of an imminent recession at one in three. This bleak fiscal outlook, particularly for the poor who often lack good credit, stems entirely from Congress' inaction.
The tax-deduction for home loans encourages middle-class Americans to buy McMansions when they ought to purchase modest homes. It also compels the poor to buy houses when they're better off renting. But instead of fixing this problem, Congress has bowed to pressure from two main groups: current beneficiaries and accountants. As a result of current policy, many of moderate income already own large houses with big mortgages. So, removing the current tax deduction directly lowers their standard of living. However, this can be alleviated by phasing the tax deduction out and using the added revenue to cut the income tax, which discourages work, and the capital gains tax, which discourages capital investment. Accountants also have a vested interest in the status quo because of the complexity. With all the strange regulations concerning what is tax-deductible and what is not, many Americans are perplexed and turn to professionals to do taxes for them. But with the increasing popularity of tax preparation software, accountants' clout with legislators has steadily fallen.
If Congress takes the initiative and replaces the flawed mortgage deduction with lower income and capital gains taxes, then everyone benefits. Businesses will reinvest more of their profits in capital while the rich will have more money to save and invest. Middle-class Americans will get to keep the fruits of their labors and poor people's ability to stay in their homes will not be subject to the whims of financial markets. Perhaps most importantly, Americans will be able to spend less time filling out forms for the IRS and more time with their families. After sitting in office for months, it's time for Congress to prove its worth.
Josh Levy's column usually appears Mondays in The Cavalier Daily. He can be reached at jlevy@cavailerdaily.com.
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