Thursday, November 03, 2005

Tax Reform and Urbanism

Earlier this year the US President appointed an advisory panel to offer recommendations for "simplifying" the federal tax structure. On Tuesday, the panel presented its report to Treasury Secretary John Snow.

Usually when conservatives like Bush speak of "simplifying" the tax system, it means finding ways to continue to expand income inequality in this country by decreasing the tax burden on the rich and increasing the tax burden on the middle class.

In conservative circles there was great hope that the Presidential commission would recommend a "flat tax" percentage or a national sales tax whose regressive nature would decrease the tax burden on the wealthy. Great conservative economic minds like that of former high school wrestling coach, Speaker of the House Dennis Hastert, have been advocating such schemes for years.

Rather surprisingly, the commission did not embrace a flat tax scheme but did recommend capping the mortgage interest tax deduction, home equity loan deductions, and eliminating deductions of local and state taxes.

This is pretty remarkable since the tax breaks--as they are currently structured--benefit those at the higher ends of the socio-economic spectrum significantly. Curiously, this is one of the reasons given by the commission in their recommendation. For more on the economic aspects of the proposals, check out David Burnori's op-ed from the Washington Post, Daniel Gross' commentary in Slate, and this article from today's New York Times.

Let me touch briefly on the portents for urbanization should these deductions be abolished. First, it is important to remember that metropolitan and suburban development in the US over the past 60 years has been largely shaped by federal tax and spending policies. Ken Jackson's seminal work, Crabgrass Frontier, gives a great background on this. Mortgage and tax deductions subsidize home owners and are largely responsible for the spawning the sprawling residential sub-divisions that are a fixture of the suburban landscape.

Private capital is attracted to these projects since the subsidy schemes artificially lower the market value of housing. Aided by compliant municipal governments who see the promise of higher property taxes, developers at the exurban fringe generally are given a green light for large-scale projects. These artificially low prices are one of the reasons for the much-publicized "housing boom" and the concominant affordable housing crisis which affects those low-income earners who cannot afford to buy a house.

Similarly, the ability for homeowners to deduct local property taxes is one of the reasons many suburban municipalities have superior public safety amenities and public schools. The fact that homeowners in affluent suburbs can write off their property taxes makes it more politically palatable to increase those taxes for quality public services.

Clearly the government involvement in these indirect housing subsidies benefits wealthier communities at the expense of poorer ones. But what would be the impacts on urban development should these deductions be reduced?

One of the arguments leveled by the commission is that the mortgage subsidy unnaturally attracts capital that would otherwise be invested in different sectors and the result is inefficiencies. They are probably correct in this assumption--however, they downplay the implications of shifting capital investment to other economic sectors.

One characteristic of the housing industry that differs from other sectors is that investment is, generally, tied to particular places. Construction creates many jobs that can not be outsourced. With the end of mortgage subsidies, capital would be invested in other sectors. Due to the increasing globalization of information technologies and manufacturing, it would not be unreasonable to expect large scale investment to pour into these non place-bound industries, continuing to improve corporate bottom lines, but doing little for the thousands employed in the housing industry.

Getting rid of the subsidy, however, would probably have an appreciable impact on suburban development. Housing value would diminish at first in order to adjust to the dictates of the market. There may be less incentive to build large, new developments at the urban fringe, however. Municipalities may be able to guide planning more efficiently without having to worry about satisfying the wills of corporate "mega-developers."

It is probably not even worth seriously discussing the commission's recommendations since they would be extremely difficult to adopt given the current political climate. Needless to say, Bush has shown no interest in making the tax system more equitable given his dastardly tax cuts for the wealthy at the beginning of his first term and his idiotic and misconceived plan to offer tax rebates to "jump start" the economy.

Furthermore, to challenge the mortgage subsidy would require substantial political courage--something hard to conceive coming from the most cowardly president since Warren Harding. Also, given the fact that suburban voters would be particularly hit by these changes, it is extremely unlikely that a Republican Congress would do anything to alienate this voting block.

There are also actually very good reasons to maintain these subsidies, which I'll take up in a future posting.

Of course, one of the main reasons for the commission in the first place was to deal with issues of economic growth in an era marked by wreckless spending deficits. Perhaps an alternative way to deal with this would be to hold Bush accountable for his miserable failure in foreign policy?