Rajiv Sethi on the double taxation debate

Again, Richard Green’s comment that academic blogs can be as much about service as they can be about self-promotion…

Rajiv Sethi brilliantly lays out the issues at play in the double taxation debate on capital gains. And while the comment zone on the inter webs is usually the Land of Untrammeled Stupidity, there is lots of smart and clarifying questions and commentary.

Drop what you are doing and go read.

Also, note his remark about my recent topic of interest:

None of this should be in the least bit surprising. Note, however, that if the corporate tax were to be eliminated today, there would be a sharp rise in the price of equities and current asset holders would enjoy a windfall gain. Similar issues arise with respect to the mortgage interest deduction: eliminating this would result in an immediate decline in home values, severely punishing those who purchased recently at prices that reflected the anticipated tax savings over the duration of the mortgage.

Ed Glaeser and why you shouldn’t worry if people do have preference for space

Why am I asking these questions other than my basic cussedness? By and large, my New Urbanism-y planners hate the deduction, and I get lectured about it all the time, and much of what they say doesn’t make sense to me. That said, I do not support continuing the deduction forever; consequentialist arguments for it, just like the consequentialist arguments against it, don’t make a huge amount of sense to me, either. However, there are some consequentialist arguments that my young planners miss, and we probably shouldn’t.

First, I’m concerned about fiddling with the mortgage interest deduction right now when such a large number of homeowners are in trouble already, even if I’m not crazy about it as policy. And given existing homeowners’ fragility, I really really don’t want to be fiddling with it now if it’s not an effective lever in land use policy. I want answers to the incidence questions I posed yesterday. It’s quite clear the benefit is more valuable to you the more interest you pay, but I don’t think that is the end of the story.

Second, dear planners, if you don’t question, you may miss a good opportunity for advocacy.

Glaeser doesn’t make this mistake. (I think he makes some others, which I’ll blog about next week). His major point here is that you can satisfy the preference for more space by building up instead of out, and that the problem of affordability in Manhattan has been due to height restrictions and overly aggressive preservation efforts than running out of land on Manhattan. His logic is good, as is his analogue: Chicago, where height restrictions have been less prevalent.

Jon Levine at the University of Michigan has argued extensively that zoning and restrictions of this ilk restrict housing choice: that there is a market for people who, under existing conditions, get forced into single-family homes who would normally go row house or big condo if there were diversity supplied in the housing market. A skylarking theory, for which I have no proof: Building multifamily is so politically unpopular that when you do get to do a project, cities I think often pursue as many units as they can because housing affordability is such an issue. There are probably economies of scale in conflict negotiation over multifamily structures. That means you aren’t necessarily developing a lot of luxury high rises anywhere except in the most expensive areas, and your troubles with neighbors there mean that your luxury high rises are *really* luxury—a small segment of your potential market.

The only way to test this issue is by easing zoning regulations and see what develops in the US. You can try comparative studies but I think it’s hard to generalize to the US at this point.

Again, I don’t see the mortgage interest deduction as a barrier to this type of development–the opposite, in fact, because even with building diversity and building up, there’s only so much land available in cities. Urban land is more expensive than land the on the fringe, for a variety of reasons, and that relationship is stable, always conveying a relative advantage for fringe development for those whose tastes go for more space. That price difference exists regardless of the deduction. By cheapening credit, you increase the possibility that, with less restrictive zoning, people can use the cheaper credit to substitute amenities for space if that is their preference.

Thus the issue is less the fact that space is a normal good that the deduction amplifies–that is probably true, but it is probably heightened by the relative lack of supply for other things in the market that one might select, given greater purchasing power. If, as my young planners and Richard Florida hope, urban condo development is the way of the future in housing in the US, making all housing more expensive by eliminating the deduction (a statement we can only make if we believe certain things about incidence) strikes me as a bit counterproductive, even if you do think rentals will be more important in future housing markets.