How Government Policies Essay (Article Sample)

Author
Tutor
Course
Date
Economics
Introduction
While many believe that interest deduction is one of the largest benefits of owning a house, most taxpayers do not enjoy this one of the main reason being income differentials. This paper seeks to discuss the benefits accruing from the interest rate deductions and its effects on the demand for housing market and rented apartment market.
The Opportunity cost of interest rate deductions and its effects on demand for housing, apartments, national productivity and income distribution.
Home Interest rate deduction is mostly considered as tax expenditure. This can be attributed to the fact that it gives benefit to a group of taxpayers. In most governments, it is one of the largest tax expenditures. Interest rate reduction for home owners typically would not benefit the middle and low income earners. The only people who receive these tax reductions are taxpayers of higher income bracket. The deduction of this interest is intended to encourage home ownership across the board due to the low installments to be paid. This would result in the expansion of home ownership creating a more self reliant society due to elimination of renters. Though this, the government allows homeowners to reduce their taxable income by the loans’ interest amount. Intrinsically, this interest deduction like any other would allow individuals to subtract costs of particular consumption items from their taxable income. This therefore implicitly provides subsidy.
Housing survey done recently indicates 10.7 million house owners go through house cost burden. 90% of these home owners earn below $50,000 yet government policies explain that individuals with income of over $50,000 receive tax deductions. This means that only 3% of the 10.7 million receive tax deductions. The survey also indicated that 77% of the tax deduction benefit went to homeowners of income above $100,000 meaning that they do not face severe house cost burdens. The main idea of this incentive is to encourage tax payers to take up more mortgages in the process creating a demand for housing. In general, the home interest deduction considerably reduces tax amount due from the household sector. This therefore means that government revenue reduces over time. Taxpayers and the economy at large would get more benefits from the removal of home interest reduction and the introduction of low marginal tax rates to try offset the change.
For a balanced economy, governments need to examine and weigh the level of benefits it gets from spending in something. The continuity of this home interest deduction is deemed unfair to the economy. It continually draws money from it and producing a small amount this not being economical. Economists prefer that government should do away with this and use the additional money in providing public goods and services. Since this only targets one side of the economy and that are the high income earners the use of the money in providing public goods like building schools and hospitals will improve the GDP in the longrun. Government also can do a lot with this tax money improving its revenue in the short-run also. With the abolishment of the home interest deduction, the demand for home ownership would go down. This is as a result of the anticipated high installments amount of mortgages. This will greatly discourage home ownership encouraging renting. This therefore results in a higher demand for apartments. National productivity will also improve because most the money that would have not been recovered in home interest deductions will be recovered because of investing in other profitable things. Home interest deduction alters income distribution. This is because it favours only those individuals with high income and high marginal tax rates. This therefore implies that only the wealthy in the society will benefit leaving the middle and lower income earners out.
How government policies can lead to market distortion and misallocate resources.
The main aims of these policies usually are to encourage the particular activities that create future taxable income. If the main aim of the home interest deduction is to encourage home ownership, then this has not been achieved fully. First it seems to favour those taxpayers of high income and most of all is the reduced government revenue. This can affect the government greatly since it would not be able to maintain its spending on public goods and services at a given level. Rather, this level of spending would reduce aver time as a result of the increase in individuals applying for mortgages. This can potentially misallocate resources crippling government activities across the nation.
The continuous provision of fund to an area that does not give returns to the government and also seems to potentially reduce national productivity is risky. Having the effect of reducing prices of homes, this allows taxpayers to own houses of their own making the renting business a less attractive business. However, since home interest tax deductions are given to few individuals, most of the middle and low income earners are therefore left to rent. This also ensures the continuous existence of the renting business and ...