Hey, what about taxes and housing policy?

June 17, 2009

Arnold Kling makes some good points about what is missing in the White House financial reform plan:

Two gaping holes in the white paper are housing policy and tax policy. On housing policy, a wide range of interest groups promotes leveraged purchases of houses. The net effects of this are the opposite of good public policy–private benefits for people in the real estate and mortgage industries with social costs in the form of paying for subsidies and cleaning up the mess.

Both the President and the white paper blame this excess leverage on greed and faulty compensation structures. What about taxes and subsidies? Our high corporate tax rate, along with the deductibility of interest for corporations, encourages corporations to look for ways to minimize equity financing. For individuals, government-subsidized mortgages and the tax deductibility of mortgage interest help to encourage over-leveraging.

Overall, the white paper offers a highly skewed narrative of the financial crisis. All of the misbehavior took place in the private sector. No mention is made of government policies that contributed. Instead, the story is one of government that needed a better regulatory structure and more powers.

Intellectually, this is a very disappointing piece of work. But given political considerations, I cannot say that I am surprised.

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