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Tax policy and the American homeownership dream

Joe Nocera in his Wake-Up Time for a Dream column today looks at whether the "financial crisis might well have been avoided if we as a culture hadn’t invested so much political and psychological capital in the idea of owning a home."

The question isn't new (I blogged about the madness of the mortgage interest deduction back in 2006), but it's worth reconsidering since this past week some lawmakers again began pushing for legislation -- and tax benefits -- that ostensibly make homeownership possible for more people.

Nocera's New York Times piece looks at the political history of the American dream of homeownership and examines the views of various housing advocates, journalists and economists on how we deal (or don't) with it.

The viewpoint that caught my eye comes from Edward Glaeser, a Harvard professor and contributor to the newspaper's Economix blog. Glaeser said that if homeownership had to be encouraged, an idea of which he was not at all convinced, it should be through a "flat homeowners' tax credit" rather than a home mortgage deduction, rather than with a tax break that essentially bribes people to buy bigger houses.

I agree with Glaeser. So do lots of others who in recent months have asked is it time to kill the mortgage interest tax deduction?

But it's not likely that we'll get rid of the home mortgage interest deduction, also known as the third rail of U.S. tax policy.

Nocera prefers the housing tax policy approach suggested by Gary Rivlin, author of Broke USA, about whom I just blogged in connection with refund anticipation loans.

Rivlin says the big policy mistake America has made as a culture is in promoting policies that encourage all home purchases, under any circumstance.

"Why should the government help me buy a second home? Why should it subsidize a refinancing?" Rivlin asked. "We have missed the essential piece. The social good is in helping qualified first-time buyers own a home. That should be our goal. After that, people should be on their own."

The limiting of home-related tax breaks is a more financially and politically feasible option. In fact, in recent years, Washington, D.C., has taken steps to wean property-rich taxpayers from some tax benefits, such as the basis change for calculation capital gains on the sale of a vacation home.

Nocera's article offers a lot of ideas worth consideration when it comes to homeownership and how we deal with it through our tax and financial policies.

Given the state of the current economy (and future economic conditions), we -- taxpayers, homeowners and legislators -- need to start looking at tax-subsidized homeownership now.

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