June 13, 2018

The Downside Of Government Incentives And Rebates

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By Juhlin Youlein

The government loves to meddle with incentives. This is not entirely their fault. Many politicians have a sincere desire to help or benefit there constituents. Economist love to study the effects of incentives on rational people. Economists want to set up policy that will benefit everyone without any bad effects. Politicians less and less care about long term effects of policy and are worrying more and more about the short run. A perfect storm situation is created when the economist team up with the politicians to create public policies. The genius of an economist being used to please the politician can create some seriously warped policy to really help in the short run and be detrimental to the economy in the long run.

The problem with tampering with incentives is the effect the policy will have on things never intended to be affected.

For example, when the government wanted to get all people in a home at an affordable rate in New York City, they set the maximum price an apartment could charge for service. This immediately let to a huge shortage on housing. Why provide housing if there is no money to be made.

The minimum wage actually inhibits the growth of a nation. What if there are a ton of teenagers that would LOVE to work for five dollars an hour for the summer if there are no jobs offered at more than that price. Making two thousand dollars in four months is better than making nothing. The minimum wage is now set at high as eight dollars an hour. This means that even if an employer could higher someone to do odd jobs for four months they won’t because it is not worth paying a higher amount.

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The list of unintended consequences can go on for ever. The incentive now being analyzed is the government creating an incentive for people to buy a home by offering to pay the interest for the homeowner.

In many ways the home interest deduction is a great idea. It offers home ownership as a tax shelter. It encourages many people to buy a home. It makes it so people are not worried about the high interest on a home.

The shelter also skews long term events greatly. Now homeowners are not so worried about putting more down for their down payment. The more a home owner puts down on their home, the lower the interest will be. Home owners to have lost the incentive to pay off there home.

So many times has the American dream been sought of absolutely owning the home in its entirety only to have financial advisors or friends or neighbors almost ridicule the home owner and make them feel foolish for paying off the home stating the loss of a tax shelter as result.

Now, instead of having a majority of America striving to pay off their homes and enabling themselves a strong sense of security, maybe even allowing for early retirement, there is no incentive to earn and pay off the mortgage.

This single policy has created a country that is only a fraction as secure as it could be. Not to mention the fact that the government taxes the landowners to only pay them back the interest deduction. Why not take away or seriously lower the property taxes and all income taxes and cut away the skewed policies of mortgage interest deductions.

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