The logic beneath the lunacy

David Frum urges us to look past Republican obstinacy and acknowledge the fact that some of their debt package proposals are better than those put forward by President Obama. He identifies a few here:

Another large tax preference is the home-mortgage-interest deduction. This preference is justified by the claim that it promotes homeownership. Yet Canada, which doesn’t have the preference, has roughly the same home­ownership rate as the United States: a little over 60 percent.

Rather than put more people into homes, the deduction puts the same number of people into more home: before the Great Recession hit, new homes in the United States averaged 2,300 square feet; new homes in Canada, 1,800 square feet.

That’s bad economics: Americans end up borrowing more to buy houses and then cutting back on other forms of saving to make up for it. The deduction is also bad for the environment, because it encourages Americans to commute farther to bigger houses that require more heating and cooling.

Here’s the good news: the deduction has already been trimmed over the past generation. Americans can claim a deduction only on their principal residence and only on a mortgage of up to $1 million. Time to reduce that cap again.

Finally, there’s the deduction of state and local taxes against federal income tax. That costs $80 billion a year, or about the same as the federal Department of Education.

Why doesn’t it trigger a revolution when California raises its state income tax past 10 percent? Or when suburban communities around New York City hike property taxes to an astonishing 8 percent of median local annual income? The short answer: the people who pay the most local taxes also receive the biggest relief on their federal taxes. Ironically, as federal tax rates rise to 40 percent, the highest earners will receive an even bigger subsidy on their local taxes.

By cushioning the shock of local taxes, federal policy induces local governments to spend irresponsibly. New York state, for example, with almost exactly the same population as Florida, spends literally twice as much.

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