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Guest Post: Housing Subsidies - Capitalism’s Smoke And Mirrors
Submitted by Ben Tanosborn
Housing Subsidies - Capitalism’s Smoke and Mirrors
I have always looked at government subsidies with suspicion… trying to identify whether they are designed to assist (those in need) or to render support (for a cause). And looking at housing subsidies has been no different.
Housing subsidies to provide assistance with shelter have existed for centuries now, and continue to exist, particularly in developing nations with a high level of poverty, a low level of sophistication in the mortgage and banking systems, and an inefficient or poor land titling system.
There has been economic justification for providing such subsidies based on both the public health argument: due to problems caused by the concentration of population in major urban areas; and the sociopolitical argument: redistribution of wealth to those considered economically disadvantaged to make up for imperfections in the market, and, oftentimes, as a preventive measure of social unrest.
Many, if not most, people would agree with the general use of subsidies in a vertical equity fashion, or the efficient redistribution of wealth for a common social purpose: social justice to provide shelter for those who need it. It is subsidies in housing designed to support a political and not a socioeconomic purpose that bother me. Subsidies as they continue to exist in the US in housing follow in this category – much in exclusivity these days to the subsidies in other developed nations the world over, at least in quantifiable terms.
There is well over two-thirds of a trillion dollars yearly in interest and property taxes claimed as deductions in the federal income tax, or allowed as a component of the standard deduction for those who do not itemize. As a result, there could be as much as $170 billion ($130 b. in interest and $40 b. in property taxes) in subsidies in 2012 by the federal government; and possibly another $30 b. in the other tiers of government, mostly from the states.
That elicits the question… could those resources, $200 billion annually, be reallocated in the economy in a more efficient way? I believe most economists would argue, without needing to resort to Debreu’s CRU (Coefficient of Resources Utilization) that the macroeconomic stability of the US would be better served by using those resources in other areas; some providing a larger multiplier effect for the economy, while others might be used to fund much needed infrastructural changes for the long term economic viability of future generations. So, if this distortionary tax/subsidy is a sad anomaly in a mature economy such as the United States, why do we have it and proudly tout it? And even more importantly, why are all of us, citizens/taxpayers, unaware… no, truly ignorant… of the true cost of this tax subsidy and its positive alternative uses? As most of us would suspect, the reason is political… with a touch of greed and self-serving by politicians.
America’s economy, our capitalistic magical perpetual-motion machine has been forever lubricated by that friction-reducer in Washington known as lobbying… the “illuminated” teaching that takes place on the politicians we elect to serve us in Congress. A division of lobbyists, between 20 and 24 for every representative and senator in the Capitol, tutor these elected officials on what’s good for the country, what might be called the gospel of free enterprise according to the special interests they represent.
One might expect some direct proportionality in the money spent by these lobbyists and the economic impact on the industries/causes they represent. And, if housing and healthcare come close in their share of the gross domestic product, shouldn’t both lobbying groups spend similar amounts? Interestingly enough, according to figures from the Center for Responsive Politics, the “healthcare giants” (American Medical Assn., American Hospital Assn., Blue Cross/Blue Shield and different groups of “Big Pharma”) spent $870 million in the last 14 years to indoctrinate (and help reelect) our politicians. Yet, the National Association of Realtors (NAR) spent only $178 million during the same period to spread their industry gospel and keep those government subsidies in place.
It should come as no surprise to find the NAR spending only one-fifth as much as the healthcare mafia. Home ownership has been made part of the American psyche, and the capitalist system, for generations… as were the other myths of exceptionalism or the American dream. Yet, after decades of blotted subsidies, the US fares no better than most industrialized nations in either the ratio of owner-occupied units to total residential units (about 68 percent) or in actual ownership (equity after mortgages are deducted)… a figure which has been decimated after the recent housing bubble.
The bottom line to housing subsidies in America – that is, allowing deductions for interest and property taxes in owner-occupied residences when computing the federal and state income tax – is one of total absurdity, more so than ever now that we have come to accept a global economy which is shifting middle-class wealth from the haves to the have-not nations… and the prospect of increased mobility due to a chronic state of high unemployment in the form of underemployment.
Housing subsidies have been not only economically inefficient, but deceivingly used by a political system using smoke and mirrors to convince us that we are all “capitalists”, instead of pawns in a capitalist system.
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Well said. "This" or "that" is a sucker's choice.
I am all for the removal of the 'unspoken entitlement' which disproportionately benefits people who can afford million-dollar homes (aka have 35% to gain from the write-off as opposed to 10%) which makes it all the more likely that any given home will cost at least as much as the maximum allowed under Federally subsidized GSE gargabe loans.
Might impact the interest-only loan farming though.
No subsidies.
Period.
Do NOT use the tax code for social engineering.
Period.
Next topic...?
"Next topic. . .?"
what is a nationstate, and how do they function?
As the sanctified Institution of the Political Means, per Hans Hermann-Hoppe.
Original recipe or extra crunchy? Extra credit: plain or peanut?
Bravo, Tyler, for having the huevos to confront the "libertarian" whiners who are no doubt TALKING THEIR BOOK, that is, are mid to upper tier homeowners. Or realtors, mortgage banker employees, etc.
A message from a renter to them worded so it might sink into their hypocritical brains: I am paying YOUR taxes.
That's right: With the help of your good Uncle Sammy, you have your hand in MY pocket, redistributing MY money into YOUR pocket! So who are you fooling!
The irony is that I am looking to buy an inexpensive house in the next year and a half, because even here in the SF BA there are pockets here and there where 150K housing is becoming available. Finally. Here's an interesting thought experiment: As I've made my "rational calculations" on the cost: price, interest, 20% down, house insurance, property taxes, mantanence, and so forth, the Federal tax subsidies Tyler points to it never entered my mind. That should tell you something: I'll experience these as a windfall a year after buying the house. IOW, it is not naturally part of the calculation: the subsidy is economically irrational.
The effect especially is to subsidize the mid-tier homeowner. The politics should be obvious: these also tend to be the "swing voters" (many upper-tier markets such as Marin, Berkeley-Oakland Hills, etc., tend to be quite liberal actually) in elections. In addition to the direct subsidy, there is the indirect prop to the mid-tier via the promotion of (currently) 3.5% down FHA loans to the bottom-tier, putting a price floor under the mid-tier.
The most pernicious economic effect of this subsidy is the promotion of either the building of a stock of (mostly car-bound) DSFH, or the preservation of an aging stock of the same. Now that might work in Texas or the Midwest where theere is flat land as far as the eye can see, but the "Flyover" style is entirely inappropriate in the SF Bay Area, whose land topology resembles more Japan than the Midwest, e.g., buildable land is relatively scarce. Yet even in the low-mid tier flats along the Bay, we are saddled with an aging stock of over-priced DSFH. The subsidy, by distorting land usage, is a major reason SF BA housing prices always remain comparatively elevated.
Kicking out this pernicious subsidy prop to prices will have two good effects: 1) It will collapse mid-tier prices, so I can buy on a short sale from the upside down "libertarian" hypocrite; 2) by cheapening the land under the aging stock, it is readied for demolition and the building of new higher density housing, increasing the housing supply and further lowering the price of housing, as the entry investment cost to housing developers is lowered.
All in all, I'd save a lot more in housing costs than I'd gain in an economically harmful tax subsidy.
So keep touching this nerve, Tyler, I'm with you 100%.
Which libertarians are you referring to? Because I don't see any of them calling for this or the housing bailout that is preventing the market for housing from clearing much lower than it is right now.
http://mises.org/daily/3128
I have an idea.
If ben is so worried about renters subsidizing homeowners how about we give renters a tax break too?
I suspect that is not the redistributive "fairness" he is aiming for
Favorable tax treatment is not a "subsidy", and a failure to tax is not an "expenditure".
Fucking liberals.
Fucking sheep.
There, I fixed it for you.
Favorable tax treatment is not a "subsidy"
"Social engineering" would probably be a better term.
1) the "subsidy" only really existed for those who owned homes prior to the tax break. After that housing prices rose to incorporate the subsidy into property.
2) the net effect long term is merely to burden first te buyers with higher down payment requirements.
3) the tax benefit mostly just impacts the first five years, which ostensibly allows new home owners more disposable income to spend on furniture and housing improvements. You aren't going to get a better multiplier bang for your buck than that kind of spending.
4) removing the tax break would just increase the cost of owning and thereby decrease values and proportionately tax revenues, so your tax "benefit" isn't as large as you claim.
In effect it was a one time stimulus that happened decades ago with some recurring forced savings benefits since people have to spend within means prior to tax refund time. It bulges the April 15 annual stimulus a bit and otherwise the market has balanced around it based on expectations. Kill it for current home owners and new buyers take most of the hit tax-wise. Kill it only for new sales and the drop in housing vales that follows will probably out weigh the taxes collected for the first few years.
So you're stuck with it bro. Blame your great grandparents.
Just curious Ben
When did allowing me to keep some of my money become a "subsidy" to me?
I guess you believe the government owns all my money but graciously gives me a subsidy when I get to keep some of it for myself
its not your money, if you want to create money you can sell personal bonds against your future earnings. its not currency but it serves the purpose. the currency is a public trust, and you pay seignory, or a fee to the issuers for the right to use the public currency. the money is yours, what you earn, while the currency is theirs. its like driving a car, the car has velocity, which measured over time is called speed, or how long it takes you to get from A to B. a subsidy is a limit on your velocity. its like why not figure compound interest by the nanosecond? a subsidy is really a limit. A can drive faster than B, so the government lets B take the shortcut. (gives him currency)
I think Ben is upset with the fact that you got to keep some of it for yourself.
Whereas most of us on ZH might be upset that everybody else (non-homeowners) didn't ALSO get to keep more of their earned income for themselves.
Lets give renters a tax break too
It really is simple. It may not seem right or fair, but is simple. What you subsidize you will get. In that subsidizing crooked bankers gets you crooked bankers and subsidizing poor people who can't afford to pay rent gets you poor people who can't afford to pay rent.
Build it ( a welfare state) and they will come
"There is well over two-thirds of a trillion dollars yearly in interest and property taxes claimed as deductions in the federal income tax, or allowed as a component of the standard deduction for those who do not itemize. As a result, there could be as much as $170 billion ($130 b. in interest and $40 b. in property taxes) in subsidies in 2012 by the federal government; and possibly another $30 b. in the other tiers of government, mostly from the states."
Is he trying to argue that money deducted from taxes is a subsidy? If the income-earner earns it and then doesn't give it to the IRS, it is a subsidy? Does this mean that the 75% of my income that isn't taxed is just one big subsidy?
A tax deduction is just a reduction in tax collected. But since they "didn't take that money" they view it as a subsidy? They act as if the government gave those people something when in reality all they did was take away less.
Secondly, these deductions, if removed, would probably just result in an adjustment to the housing price.
If I am NOT going to save x dollars on tax deductions, I'm going to offset that by reducing my mortgage payment. Housing prices would probably in general adjust downwards for the lack of the tax deduction, which would just reduce the property tax collected.
They'll extract the money one way or another.
Yep, their starting point is that "our" hard earned money is really their money. Its only on loan to us. Slavery indeed.
$200 billion ain't much. Spend that much in Afghanistan which would me much easier to eliminate.
2 abandoned bank-owned homes on our street. How knows how many, total, in our village. Are the banks that own the houses paying the property taxes? NO? Then why is our village not expropriating the houses, paying the many carpenters who live here to fix them up, selling them, and giving the finger to the banks?
OT: Four words could save you a bundle!
http://investmentwatchblog.com/four-words-could-save-you-a-bundle/#.T67J11xYuIA
Americans are so naive. They thump their chest and say “WE’RE NUMBER ONE!” claiming the best health care in the world. American health care is a FRAUD, fully available only to those with lots of money or lots of patience.
The govt should get rid of sales and income taxes, and then only tax land.
I agree with zero social help for able bodied people. If you want to help them out then do it with YOUR money.
The gov't. should get rid of all taxes but tobacco taxes.
"Don't tax me, don't tax thee, tax the man behind the tree."
Why not advocate a simple IRS form for everybody?
How much did you make? Send it in. We'll decide what's best and we feel that giving everything to the top 1% is the best idea and it's working so far because you slobs wouldn't know what to do with it anyways.
[SARC]
No way dude. People could still cheat by using cash or PMs. The only solution is 100% withholding! Then the properly-appointed commisars could decide how much you are allowed back based on a broad-based spectrum of social justice parameters, party contributions, fealty to the State. etc. The Nanny State would thus ensure the FAIR and EQUAL distribution of your allowance, comrade. FORWARD!
I'm not following here.
A personally owned home is the equivalant of a residential domestic business enterprise. Its members undertake for profit activities, invest capital, conduct R&D, and inccur expenses on behalf of the enterprise. A successful business tends to create marginal growth in supporting businesses such as furniture, appliance, contracting, tele comm and info networking. Service industry activities are also spurred. Key components for business operations are the business location, often requiring interest and tax expenses. How is this any different then a retail store?
so you're saying that businesses should not be allowed to deduct expenses, or only businesses you didn't like? Just sounds like another central planner trying to justify stealing more money from the peeps.
The housiong market is distorted by the mortgage and property tax deductions for owners AND by the subsidies in the form of Section 8 payments, and rent regulations which benefit renters - not to mentionand the tax subsidies given to developers.
The overall cost of housing is higher for all as a result but lots of luck getting rid of any of those subsidies. NYC's housing market has been grossly distorted by rent control and stabilization - giving renters ridiculous 'rights' to property they do not own. But while a few benefit from UNDERmarket rents, others are paying far too much for rent - a situation abetted by government rent subsidies.
Ihe irony is that private enterprise had managed to build great housing at affordable rents - some was built by unions for workers but other complexes were built by for profit enterprises meeting a real social need. SUch complexes have turned out far better than government built public housing BECAUSE those living there were held responsible for their actions and had pride in where they lived.
Seems like govertment is now trying to take 'housing rights' to a new level - insisting that 'affiordable housing' be made available everywhere. Westchester County in NY has been going through this for yearas. I grew up in the area. I could not afford to live there when first married - We lived in the Bronx - where apartments were cheaper. There's a reason those apartments wwere cheaper - and it had little to do with any government regulation. Frankly , too many peopel in the area benefitted from goernment help - and without it would have lived in far worse places (those are the ones that dumped trash out the window instead of walking it to the basement). Later, after our earnings increased, we could move to 'better' housing and later, aftger working hard and saving, actually buy a house (with 20% down, paying over 8% interest).
We bought at a low in the market and benefitted from our prudence. It's a nice area but I'd 'like' to live in a 'nicer' (far more expensive) area - but can't afford to..... I don't have a 'right' to live somewhere I can't afford - why should anyone else?
I dealt with a Section 8 tennant in my parent's old 2 family house. Mom was trying to help out a single mother - who as it turns out was more interested in gaming the system. Would never go through that again - though another multi-famly owner LOVED the guaranteed payments from Section 8. Too bad the neighbors hated the people living in that place (with reason). The old owner was pretty sleective in whop he'd rent to - had long term tennants who were great neighbors. Teh new owner didn't live there and the cops were by regularly to deal woth oproblems. Teh turnover was high and the tennants problems. They wanted to live in a 'better' neighborhood but there presence made it worse rhasn it had been before their arrival.
Sorry, but there are 'good' (and expensive) places and 'bad' (less expensive) places to live. The'bad' neighborhoods may be near an oil refinery (which was ther first) because land was cheaper there.
IMO you have the 'right' to live wherever you can afford to live. No discrimination based on race or creed - just plain old capitalist demand and supply. Demand for 'good' places to live is high ('good' being a subjective measure, be it location, schools, whatever). For someone making a fraction of my income saying they have a 'right' to live where I now do is absurd. It took us years and hard work to afford where we now live - why should someone get a government subsidy to live here and benefit from the (high) property taxes I pay as part of the cost I bear in living here? I may now benefit from a mortgage deuction and property tax deductions I go t no help whatsopever before moving here.
Frankly I'd love to see property taxes lose their deductability - that would force local governments to back down on the never-ending increases. A wider based tax on ALL in a community would be fairer.
It's not just housing subsidies but the global capitalist system itself that is one of "smoke and mirrors".