This morning I stumbled on an Economist article discussing a tax arrangement that’s distorting our world like a SciFi super villain. Unfortunately, our tax plan’s Lex Luthor also has the popularity of Superman: tax-free debt.
If you don’t want to click the link above for fear that your friends will think you’re a haughty intellectual (“I read The Economist” must always be said in your most high brow British accent), let me summarize. Businesses and individuals in the United States and many other countries around the world get a tax deduction for the interest they pay on debt. This unnecessarily promotes debt, which makes economies more prone to crises, which leads to Mad Max type apocalyptic scenarios.
Just look back a few years for a poignant example. Although people still disagree over some of the causes of the Great Recession, most agree that the bursting of the housing bubble made it infinitely worse. Without the type of home ownership debt we were seeing at the time, the recession wouldn’t have been nearly as severe.
And whose to blame for everyone jumping into the debt pool? Again, there’s plenty of blame to go around, but the Home Mortgage Interest Deduction definitely plays a part. If you’ve bought a home, you’ve gotten the “don’t forget that you can deduct the interest” speech from your Real Estate Agent.
The Economist also points out the foregone tax revenue from allowing debt to be deducted, but I’m not sure I believe the quarter of a trillion amount they propose. For every debt deduction is an interest income, and while they certainly won’t offset exactly, I’d have to see more evidence before I believe the difference is $725 billion a year.
Although getting rid of the Mortgage Interest Deduction may be a struggle, it’s the business interest deduction that’s the real fight. And it’s the one that really needs to be removed.
When I read through this, my first through was, “hey, this sounds familiar.” That’s because removing the debt deduction is one of the principle points of Marco Rubio’s tax plan.
Would The Economist support all of Marco Rubio’s proposal? No, since he still includes the Home Mortgage Interest Deduction as one of the few deductions allowed. That’s still included for political reasons, since 65% of people own their homes here, and we want our deductions, gosh darn it. I like mine as much as the next person. But if it comes to swapping a nice deduction for a reduced likelihood of another Great Recession, I know which one I would choose.
So what do you think? Should we push for Marco Rubio’s plan to help remove the tax-free debt deduction that is causing economic distortion? Or should we go for something completely different?