

The Debt Economy (should tax deductions on interest be eliminated?) - cwan
http://www.newyorker.com/talk/financial/2009/11/23/091123ta_talk_surowiecki

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fnid
I do believe it was the mortgage interest tax deduction that helped create the
real estate bubble. Lots of people said, "It's okay, I can deduct the interest
from my income. I pay a lot less taxes now!" Not even aware of where the money
was going and that they were spending two dollars to save one.

We need to reward saving, not spending. I know we have a consumer economy and
everyone loves everyone to spend, but we _must_ change that economy for the
sake of ourselves and the world, and definitely if we wish to preserve our
position in the global hierarchy.

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jhancock
Mortgage interest tax deductions were certainly an accelerant, as they were
designed to be, but that alone wasn't to blame. Packaging mortgages into
investment vehicles was a horrifically bad affair which was at least the
number two ingredient. How do you manage to take 10,000 mortgagees that on
average represent 7% 30 year loans and end up with a packaged investment that
rates at 20% return? This involved some loose and unregulated mark-to-market
math and relied on home turnover in a superheated market. Once leveraged
instrument after instrument has been added into this unregulated space, you
end up with an enormous unmeasurable structure of debt that has little to do
with houses.

So it may well be true that mortgage tax deductions were a necessary
ingredient, this alone did not cause the debt explosion.

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bwd2
Yeah, that's a good idea, let's penalize capital formation even more while
we're trying to recover from an economic downturn. If you want to level the
playing field between debt and equity financing for business, maybe you should
make dividend payments deductible so that mature businesses will have more of
an incentive to return cash to shareholders.

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timwiseman
Removing the tax shield that some forms of debt provide would only make one
avenue of capital raising difficult, it would act much more to encourage other
forms of capital raising than to put any kind of stop on it.

This could of course be counterbalanced by making other forms of capital
raising easier by doing such things as lowering capital gains tax or, as you
suggested, making divident payments deductible.

