Wednesday, April 20, 2011

Taxes and Incentives

Lately, I have been following the budget discussions in DC. I enjoy thinking about financial issues and also the Republican leader (Paul Ryan) on this issue is a Miami University grad. My information gathering has centered around reading the New York Times, Wall Street Journal, Star Tribune, Paul Krugman's blog and part of Paul Ryan's The Path to Prosperity. It is an interesting discussion going on in DC and I would like to add my thoughts on a small part of the discussion; taxes. Specifically, I would like to write a little about the incentives in our current tax code.

I was reading this article in the Star Tribune, and what really stuck out to me was "there are breaks for having children, paying a mortgage, going to college, and even paying other taxes." The article then goes on to quote that "the tax code is filled with a total of $1.1 trillion in credits, deductions and exemption." Now, I am sure that that a lot of these deductions are legitimate, but I have a few questions about the logic behind two of them.

Why are we incentivizing Americans to take on a mortgage or have children?

It seems like the American government is trying to influence Americans into buying homes and having children. I find this baffling. There are definitely benefits to having children and owning a home, but I can't say that it without a doubt either benefits the American public. People who rent and don't have children might even benefit the American public more.

Renters generally live in places that are more urban, which according has certain advantages summarized in this Freakonomics article entitled Why Cities Rock. It is based on a book by Edward Glaeser called Triump of a City, which states that urban environments are "actually the healthiest, greenest, and richest (in cultural and economic terms) places to live" Also, one huge advantage of renting is the flexibility it provides the renters. When you rent you are in a better situation if the job market changes. Instead of being tied down to a certain area, you are able to go where there are jobs. When I was looking for a new job, it was extremely valuable to me that I was able to interview in North Carolina, Milwaukee and Minneapolis. If I owned a home that wouldn't have been nearly as easy.

Based on that above paragraph, it makes zero sense to me why Americans are allowed to deduct the interest they pay on their mortgage. Why are we subsidizing home ownership? The benefits to the public are debatable at best.

As for the child tax break that also seems even more surprising. Maybe there is something I am missing, but wouldn't it better for the public finances to have less children? Children equal higher hospital costs, school costs and more competition for jobs. Of course children also become the next innovaters and job creators, but my guess is that those children probably come from stable families that would have a child regardless of any tax breaks. It seems to make more sense to have a tax break for people that don't have kids. That incentive to not have children might result in that only people who really want to have kids would be the ones procreating. On average I think that the more somebody wants a child then the better parent that person will be.

I am not trying to be flippant about owning a home or having children. Both are two huge life changes that I would like to go through in my life. I look forward to the day of having a lazy weekend breakfast with M and our children in our own home. My main point isn't that I don't like home ownership or children. I do. I just don't think the government should be involved in either decision. The US government has no place tailoring their tax code to effect either behavior.


BC said...

They incentivize both in a number of other ways. Why not through the tax code?

mary said...

A couple of converse thoughts... homeowners are probably more vested in improving their community, resulting in higher property value. And I wonder if the kid break is like the inverse of China's one child rule: to help with population growth.