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Chadwick: Obama’s Budget Could Hose Housing

Lowering taxes in the midst of a recession is considered, in the science of economics, to be an expansionary move, i.e. one that will help to stimulate economic growth and end the recession.

The obvious corollary is that raising taxes during the midst of a recession is an economically contractionary move, one that will act to remove a stimulus to economic recovery and which will impede growth. So purely from an economic and mathematical point of view, it seems that the tax increases proposed in the current budget plan will only serve to lengthen this already seriously deep recession.

But over and above that, the proposal in the budget to reduce (for those paying the highest tax rates) the deductibility both of mortgage interest payments and of charitable donations is likely to be particularly counterproductive to two sectors of the economy most needing help at this time, namely housing and not-for-profits.

In the case of mortgages, the deductibility of mortgage interest has for decades been a part of the American credo, that home ownership should be supported by the Federal Government. The U.S. is different from most other industrialized nations in that support, but it has been part of the fabric of the economy of this country since the end of World War II. Some modifications have been made to it in the last decade, most notably the elimination of interest on mortgage debt above $1.1 million, but that was met with little resistance for the obvious reason that it impacted so little of the population.

However, with the housing market nearly morbid today, it is appalling to see a budget plan that would do anything to further reduce the deductibility of mortgage interest payments. The market for houses of every size and price needs to be stimulated. Scores of editorials have been written on how a $250,000 income for a family of four in the most inhabited cities of this country is far from a sign of wealth. But under the new budget plan, such a family would find its marginal tax rate increased and its ability to deduct its mortgage interest decreased, and depending on the size of their mortgage, the cash flow impact could be meaningful.

The same is true for charitable donations, which would be treated similarly under the new budget plan. This would impact individuals/families and corporations. Regardless of the level of income, virtually every person and corporation in this country works on some kind of budget. Corporations are ultimately accountable to their shareholders, and charitable giving is calculated based upon the net impact on the bottom line, i.e. on the income that belongs to the shareholders. If income tax rates increase, the benefit of a charitable contribution is also increased, as the Government in fact subsidizes a portion of that contribution. But if tax rates increase, and the Government reduces the amount of the deductibility of the gift, then there is a negative economic impact which is borne solely by the donor.

Charities all over this country and the world are suffering from the ravages of the global recession and they need help from corporations and people more than ever before.

Now is the time to encourage more giving by increasing the tax advantaged nature of charitable giving, rather than punishing the best intentions of those trying to help others in need.

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Patricia W. Chadwick has had more than 35 years of investment experience. She is the founder and president of Ravengate Partners LLC, a consulting firm that provides advice on financial markets and global economics.