Taxing Mortgages: Another Red Herring
Harry Gunnison Brown
[Reprinted from The Freeman, January, 1939]
There appears to be considerable popularity in the idea of taxing
mortgages, and loans in general, presumably on the theory that the
holders of mortgages and other claims on borrowers are well-to-do
persons who can well afford to pay taxes. And it appears to be
popularly believed that unless mortgages are especially taxed, the
owners of such claims escape paying their due proportion of the
expenses of government.
The fact is that owners of mortgages really pay approximately the
same tax, when all physical property is taxed, that the titular owners
of such physical property pay on their equities in it. For when
capital is taxed, the titular owners receive smaller net income from
it; and they cannot and will not pay, therefore, as high interest
rates to lenders as otherwise would be possible. If a man hopes to
make, through an investment of $1,000 in improving a farm, a net
yearly gain of $80, or 8 per cent, he can afford to pay not over 8 per
cent for the loan that makes the investment possible. But if the
improvement is to be taxed at a rate of 3 per cent, he cannot afford
to borrow unless the rate accepted by the lender is 3 per cent lower,
or, at the maximum, not above 5 per cent. When physical capital is
taxed generally throughout the country, therefore, the demand for
loans inevitably so declines as to lower the interest that lenders can
charge if they lend as much as before.
But to make the argument complete, it is necessary to consider the
supply of loans as well as the demand. Here the point is that a 3 per
cent tax on all capital means the lender realizes 3 per cent less on
savings that he uses himself, e.g., in improving his own-farm. If he
has saved anything, the comparative advantage of lending and of using
is just the same after such a tax as before. So if, before the tax, he
would have been willing to lend at 3 per cent, why should he not be
willing, after the tax, to lend at 5 per cent? A tax on all tangible
property certainly does not leave un-taxed the holders of mortgages,
bonds and other claims on borrowers.
If now there is a special tax on mortgages in addition to any tax
laid on tangible capital, such a tax puts an added burden on borrowers
-- insofar as they can afford to be borrowers. For the great majority
of lenders do not have to lend. They can, if they like, use their
savings to buy or to build houses, stores, barns, etc. They can, if
they like, buy farms instead of lending money to others to buy them.
They can, if they like, have tenants on their property, who will owe
them a certain amount per year for the use of it, instead of debtors
owing them a certain amount per year as interest on loans. If there is
a special tax on mortgages and on loans generally, in addition to the
tax, if any, on tangible capital, but no special tax on the privilege
of having tenants or the privilege of operating property with the aid
of hired labor, most persons who have saved anything and who are in a
position to lend, WILL REFUSE TO LEND UNLESS THEY ARE PAID HIGHER
INTEREST BY ENOUGH TO MAKE UP FOR -- OR PRACTICALLY MAKE UP FOR -- THE
SPECIAL TAX. Therefore, interest rates to borrowers are bound to be
higher. In the pretended effort to make things easier for the
much-bally-hooed "poor home-owner" and "poor farmer,"
through putting special taxes on mortgages and loans and thereby -
possibly -- making a tiny reduction in taxes on real estate, a
distinctly HEAVIER burden is put on those homeowners and farmers who
can be titular owners only by borrowing and who must now borrow at
higher interest rates -- or give up the hope of titular ownership and
resign themselves to remaining in the status of tenants! Only as such
a tax is evaded, as, in truth, it often is, can it fail to be a real
burden and handicap to borrowers.
As long as economic illiteracy is so vast and widespread, it is bound
to pay those who are ambitious to enjoy distinguished political
careers, to endorse, with great fanfare of publicity and enthusiasm,
these quack remedies. Such would-be political careerists will not
always be, indeed, altogether insincere, since they spring, largely,
from the economically illiterate masses. But the intellectually keener
of these comparatively honest careerists (and how many in any walk of
life are completely honest, even with themselves?) will perhaps
vaguely sense the fact that they can get farther politically, as "leaders,"
by appealing to current ignorance and prejudice than 'by seriously
analyzing the economic system.
These intellectually keener careerists will, perhaps, vaguely
understand that the real truth -- should they seriously take the
trouble to discover it -- might not make them as popular with the
masses as the tripe it is customary to feed to them; and that
therefore a politician who wants to enjoy the delicious feeling of
being sincere and who wants, also, to be able to address really
enthusiastic' crowds with ringing conviction, does better NOT TO
UNDERSTAND ECONOMIC PRINCIPLES TOO WELL. They may somehow sense the
fact, though never openly admitting it even to themselves -- else how
could they continue to publicize their "sincere and honest"
convictions? -- that one who tries to LEAD, seriously and
intelligently and disinterestedly, can seldom be a "leader."
For if these politically ambitious men really applied intelligence to
the problem of tenancy versus ownership, and if they were at the same
time completely sincere in the intention to state the truth about the
problem, and were not primarily interested in getting the votes of the
well-to-do investors in land and of the economically illiterate and
prejudiced poor, not only would they NOT seek, taxes on mortgages and
loans, but they WOULD seek to substitute taxes on the
community-produced location value of land for other taxes that now
rest heavily on wage earners, tenants and the poorer home owners. For
if community-produced location values are taxed -- values for which
community growth and development are responsible and which are not
produced by the labor of individuals -- then speculative holding of
land does not pay, land is cheaper for tenants to buy, home ownership
is easier to achieve and the condition of tenancy is easier to work
out of.
Abolition of taxation on mortgages and other loans, so as to make
interest rates as low as possible to (borrowers, abolition of taxation
on the goods poor people buy, abolition of taxation on the
improvements and other capital men construct by their labor, put the
levy of high taxes on community-produced land values, to the end that
sale prices for land may be low -- this is the effective route to the
decrease of tenancy and the increase of home ownership. HIGH SALE
PRICES FOR LAND ARE NOT A BLESSING BUT ARE, RATHER, AN ECONOMIC AND A
SOCIAL CALAMITY.
But so long as our ambitious politicians feel that their careers are
best assured by appealing to the desire of landowners for low taxes on
the community-produced location value of land and for high sale prices
of land, and toy appealing to the notion -- easily induced among the
economically illiterate and prejudiced poor -- that thereby
home-ownership is to be increased, tenancy decreased, and the "poor
home-owners and farmers" aided, little practical progress can be
made. A saving remnant among the masses -- and even, perhaps, among
the literary intelligentsia -- must become so well informed that to
them, at least, and, gradually, to a larger and larger number, the
tripe commonly fed to the masses by ambitious politicians makes these
politicians look so silly that they lose both their dignity and their
mass appeal.
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