TEXT OF INTERVIEW
Scott Jagow: Foreclosures nearly doubled last month compared to last year. There were a quarter of a million of them in the U.S. Congress is trying to think up ways to fix the mortgage market.
Our economics correspondent, Chris Farrell, believes getting rid of tax breaks for homeowners would be a good start. That includes the mortgage deduction on your taxes. Chris, are you serious?
Chris Farrell: Yes I am. I mean, I know this is going to make me popular — it’s like going against Mom and apple pie, it’s one of those sacred cows in Washington. But we have this boom in real estate that went bust, and we have all these problems that are going on right now. But if we take a step back, one way of looking at what happened is because of all these tax subsidies. We over-invest, we put too much of our money into real estate. And yes, I would get rid of the homeowners’ reduction, I would get rid of the favorable treatment of capital gains — more important when it comes to real estate. I probably can’t make a case, or convince enough people on the home mortgage deduction, but I think I can make a pretty compelling case on that capitol gains.
Jagow: And exactly what’s the situation with the capital gains on housing versus, say, stocks?
Farrell: Right. The treatment of capital gains changed in 1997, and we just ended up favoring real estate. Imagine you’re a couple, you own a home, you sell it for a $500,000 profit. Zero capital gains tax. Now, when this law was passed in 1997, the capital gains tax rate on stocks was 20 percent. That capital gains tax rate is now 15 percent. Now, I’m no math genius, but to me it seems we really favored real estate with your investment money versus stocks. Why would we want to do that? That’s a mistake, that’s what I would change.
Jagow: And I think the one argument you’re going to get here, Chris, is that the whole idea of tax subsidies is to encourage people and allow people to own their own homes when they might not be able to do otherwise.
Farrell: Well, here’s the economist’s answer to that: People are still going to own homes. They might be smaller homes. They might not be McMansions, because what the subsidy has really done is encouraged people to buy bigger homes, and what the conventional wisdom — it drives me crazy, but you know, “Buy as much home as you can afford.” Right? Well, the only reason why that’s out there is because of the subsidies, ’cause Uncle Sam picks up part of the tab. You take away that subsidy, what’s going to happen, people are still going to own homes, but they’re going say rather than buy as much home as you can afford, it’s going to be, “Eh, I’m not going to put so much money into housing. I’m going to put more into stocks and bonds.”
Jagow: All right, Chris Farrell, our economics correspondent. Thanks.
Farrell: Thanks a lot.
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