Tuesday, November 16, 2010

Hudson calls the deficit commission by its real name

The American commentator Michael Hudson has a great piece on President Obama's bipartisan commission whose mission is to "cure" the U.S. budget deficit. As Hudson says:
The National Commission on Fiscal Responsibility and Reform, known as the Deficit-Reduction Commission” among media friendlies, might better be called the New Class War Commission to Scale Back Social Security and Medicare Payments to Labor in Order to Leave more Tax Revenue Available to Give Away to the Super-Rich. A longer title, but sometimes it takes more words to get to the heart of matters."
Which is funny, in a tragic and serious kind of way. But that's not the main point of this blog. We are interested in what he has to say about tax, and specifically the fact that the Commission wants to scale back mortgage deductibility for home owners. That is, the fact that you can deduct your mortgage payments against tax. This is something that we have blogged on several occasions in the past, such as here. That post explains the offshore angle that is important in this respect, and the way that entire tax systems are skewed in favour of debt leveraging.

On one level, Hudson supports the proposal.

"Defenders of stopping this tax credit make the valid point that the mortgage-interest tax deduction does not really save homeowners money at all. It is a shortsighted illusion. And this argument is right – absolutely right. What the government gives to “the homeowner” on one hand is passed on to the mortgage banker by “the market” process that leads bidders for property to pledge the net available rental value to the banks in order to obtain a loan to buy the home (or an office building, or an entire industrial company, for that matter.)"

To put it more crudely, property owner make big tax savings on the face of it - but the market then transforms these savings into higher rental and land values, which then get turned into bigger bank loans and bigger bank profits. At the end of the day it is the bankers, not you, who get the benefit. And you have to pay higher personal and sales taxes to make up for the tax shortfall too. Without the tax subsidy, your house and rents (and mortgage payments) would be cheaper, and you would ultimately be no worse off. Remove the subsidy, and you get to tax the banks by a side entrance. Which is a very good idea. Or at least, given that this would be costly for ordinary people during a transition phase, there should be a cap on interest deductibility.

But there is another part to his argument, which highlights the real cynicism at play.
"I support removing the tax favoritism for debt leveraging. The problem with the Deficit Commission is that it does not extend this reform to the rest of the economy – to the commercial real estate sector, and to the corporate sector.
. . .
This tax bias for debt rather than equity is largely responsible for loading down the U.S. economy with debt, encouraging corporate raiding with junk bonds, adding interest to the cost of doing business, and hence causing the debt deflation that is locking the economy into depression. This subsidy for debt leveraging also is the government’s largest giveaway to the banks. And it also happens to violate every precept of the classical economic drive for “free markets” in the 19th-century."
Hudson's article is perhaps a little hastily written, but well worth reading.


Blogger Derek said...

Professor Michael Hudson, the economist and land value taxer, always has something worth saying. If you like what he has to say in this piece you might well be interested in his other essays on his personal blog

11:07 pm  

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