The Mises Institute monthly, free with membership
Volume 14, Number 3
The government always wants more of our money, and too many economists are ready to
the case for surrendering our last dime. During the budget hysteria of 1990, for example, many
economists claimed that the government needed to raise taxes to balance the budget. Anyone
who disagreed was supposedly unwilling to confront the hard fiscal reality that the public needed
to be taxed more.
Five years later, spending and taxes were higher than ever, and the deficit still giant.
these economists didn't repudiate their bad advice. They had moved on to denounce the per-child
tax credit, which they called an "expenditure" that "we" can't "afford." It would cause
"distortions" in the market and wouldn't help economic growth.
Economists who serve as the government's intellectual shocktroops don't want people to be
allowed to keep more of their own money. The particulars don't seem to matter. Outside the
Austrian School, few economists have any kind words for tax breaks. Likewise, they can't praise
tax increases enough, for a tax increase, they promise, will balance the budget, though it never
does and never will.
Surely no tax deduction has been so despised by non-Austrian economists, but loved by
else, as the home-mortgage deduction. Just as quickly as the child tax credit took a dive, a new
hysteria began, this time to repeal one of the last remaining tax breaks for regular Americans.
This deduction, we were told, is a terrible remnant of a bygone era when tax policy
people to buy homes. This "bias" in the law has caused a "distortion" in the market by
"subsidizing" home purchases. For that reason, the tax break must be repealed, the distortion
eliminated, and the middle class made to shape up.
How will this affect the home prices and the real estate market in general? Not at all, these
economists say. Homes will be more affordable because interest rates will fall. What they don't
explain is how this "distortion" can be eliminated without causing a decrease in the demand for
housing, and thus a fall in housing prices and an industry-specific downturn.
In fact, there is nothing horrible or distorting about people spending their own money on
something they want, which in this case is homes. A tax break cannot create a demand for a
product. It only makes a product slightly more inviting to purchase as compared with more
taxed alternatives. The real "distortion" is not the tax break but the remaining high taxes.
Neither can a tax break be called a subsidy. People can deduct the interest, but that's not the
thing as taking other people's money. It means that a tiny bit of income is sheltered from the tax
And why is this the only remnant of the old days that we are supposed to repeal? Why not
Mae, Freddie Mac, Ginnie Mae, FHA, and VA subsidized mortgages? And if we are worried
about "subsidies" to housing, why not stop funding the gigantic public housing industry? Or why
not save $30 billion and abolish HUD, big housing's best friend?
No, that's not part of the discussion, even though these remnants do distort the
market by using
tax dollars to promote and finance mortgages, and construct free homes.
If economists worry that the mortgage-interest deduction causes more single-family houses
bought than apartments rented, there's a way out. Introduce a deduction for rental payments, so
there's no financial advantage to buying over renting. But the fact that this is ruled out shows that
the real bias is toward helping the government.
Since repealing this tax break is the same as increasing taxes, it is doubly irresponsible for
economists and politicians who claim to favor free markets to add their voices to the chorus of
deduction haters. Repealing deductions doesn't make the market more free; it only leads to more
plunder of property owners and less prosperity.
But if the mortgage-interest deduction is repealed, won't interest rates go down? Not
It is impossible to look at, say, a 7% interest rate and know how much of it is the "real" rate, how
much is the inflation premium, and how much is a result of tax policy.
Predictions about falling interest rates are as likely to come true as any other econometric
prophecy. We can only know that we will be denied one of the few remaining windows of tax
freedom left in American life.
Notice too how economists who gripe about the "distortions" of tax deductions never bring
the distortions of taxes. The income and social security taxes, which together can rob America's
most productive citizens of up to half their earnings, discourage work, saving, and investment,
and act as a drag on economic growth.
The words distortion and taxes are inseparable. Medicare taxes reduce medical savings.
taxes discourage production of the good being taxed. Inheritance taxes cause people to shorten
their time horizons and drain savings before death. Nanny taxes reduce the amount and quality of
The average American works 171 days, from January 1 until June 20, just to pay his taxes.
hardly ever hear about this distortion, while the fact that people are allowed a little tax freedom
when they buy a house causes a frenzy.
It just goes to show, once again, that America has produced no greater crop of liars and
scoundrels than most economists, ever anxious to give the government more power and always
ready to offer a pseudo-scientific excuse to reduce our liberties.
Alone among those running for president, Steve Forbes dared question the idea of revenue
neutrality (code for: "the government's income can never be allowed to fall"). Good for him: his
proposal for lower taxes--as versus just shifted-around taxes--stole the show because
exactly what overtaxed Americans wanted to hear.
But he undermined his message by calling for the repeal of all remaining tax deductions,
including the charitable deduction. Predictably, bad economists also denounced this deduction,
and assured us that its repeal would eliminate another "distortion."
In an age of Leviathan, with falling living standards and ever-higher taxes, there's only one
of tax reform worth pursuing: that which gives us lower and lower taxes until freedom,
prosperity, and private property are again safe from the government. Only when taxes are no
longer a burden on business and families can we say that real distortions have been repealed.
Llewellyn H. Rockwell, Jr. is president and founder of the Ludwig von Mises Institute