Obama's Greatest Betrayal: The Coming Sell-Out to the Super Rich and What It Means for the Rest of Us
Continued from previous page
The giveaway: the Commission’s position on tax deductibility for mortgage interest
The Obama “Regressive Tax” commission spills the beans with its proposal to remove the tax subsidy for high housing prices financed by mortgage debt. The proposal moves only against homeowners – “the middle class” – not absentee owners, commercial real estate investors, corporate raiders or other prime bank customers.
The IRS permits mortgage interest to be tax-deductible on the pretense that it is a necessary cost of doing business. In reality it is a subsidy for debt leveraging. This tax bias for debt rather than equity investment (using one’s own money) is largely responsible for loading down the U.S. economy with debt. It encourages corporate raiding with junk bonds, thereby adding interest to the cost of doing business. This subsidy for debt leveraging also is the government’s largest giveaway to the banks, while causing the debt deflation that is locking the economy into depression – violating every precept of the classical drive for “free markets” in the 19th-century. (A “free market” meant freedom from extractive rentier income, leading toward what Keynes gently called “euthanasia of the rentier.” The Obama Commission endows rentiers atop the economy with a tax system to bolster their power, not check it – while shrinking the economy below them.)
Table 7.11 of the National Income and Product Accounts (NIPA) reports that total monetary interest paid in the U.S. economy amounted to $3,240 billion in 2009. Homeowners paid just under a sixth of this amount ($572 billion) on the homes they occupied. Mr. Obama’s commission estimates that removing the tax credit on this interest would yield the Treasury $131 billion in 2012.
There is in fact a good logic for stopping this tax credit. The mortgage-interest tax deduction does not really save homeowners money. It is a shortsighted illusion. 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.) “Equilibrium” is achieved at the point where whatever rental value the tax collector relinquishes becomes available to be capitalized into bank loans.
This means that what appears at first as “helping homeowner” afford to pay mortgages turns out merely to enable them to afford to pay more interest to their bankers. The tax giveaway uses homebuyers as “throughputs” to transfer tax favoritism to the banks.
It gets worse. By removing the traditional tax on real estate, state, local and federal governments need to tax labor and industry more, by transforming the property tax onto income and sales taxes. For banks, this is transmuting tax revenue into gold – into interest. And as for the home-owning middle class, it now has to pay the former property tax to the banker as interest, and also to pay the new taxes on income and sales that are levied to make up for the tax shift.
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.
The argument is made that “The rich create jobs.” After all, somebody has to build the yachts. What is missing is the more general principle: Wealth and income inequality destroy job creation. This is because beyond the wealthy soon reach a limit on how much they can consume. They spend their money buying financial securities – mainly bonds, which end up indebting the economy. And the debt overhead is what is pushing today’s economy into deepening depression.