Publisher's Note: Rewarding debt
By Jody Reese
There’s a general consensus now that Americans need to save more; however, our federal laws and tax policies need to play catchup. In fact, the federal government encourages a debtor society through lax lending regulations, cheap interest rates and a tax code that favors debt over equity.
Going a long way to change that would be to end the home interest deduction, which lets some homeowners not pay taxes on income that goes to pay mortgage interest.
As it is now the person who buys a home with cash is at a huge disadvantage compared to someone who takes out a mortgage. The one who borrows gets a sizable write-off while the person who buys the home outright gets no tax deduction. In fact, the cash buyer in effect pays higher taxes to offset the $100 billion or so annually that goes to cover the cost of the home interest deduction.
Economists have also said the home interest deduction doesn’t actually help more people get into homes, as it was intended, but instead allows people who can afford a home to just buy bigger homes. So in effect the government is helping people buy bigger homes while people who can’t afford to buy a home or don’t want to buy one help pay for it through their taxes.
While ending the deduction outright would be harmful to the economy now, it could be phased out over several years. The result would be a fairer tax system and one that doesn’t favor debt over equity.