Fiscally Demanding

Fiscal policy is on a controversial three and a half trillion Federal budget. The Federal budget includes the Federal funds rate, the money supply and the use of credit so because all the revenue ultimately comes from taxes on your income, it is important to know how it is spent and where American tax dollars are going. Government spending and specific government policies or programs, (subsidized loans such as the FHA program) cannot occur without first taking money from the private sector (loans and grant programs and even taxes are all done federally). Spending and taxes reduce the amount of resources an individual has to spend.

While fiscal policy, or the Federal tax policy, can stimulate, guide, or depress the economy, only businesses can create economic growth. In current years, ongoing deficits led to the $13 trillion national debt which had caused a dramatic increase in unemployment rates and while taxes were increased, many people feel it was the worst depression since the Great Depression. Just like the objective of the Federal Tax policy, the monetary policy, is utilized to control inflation as it too may stimulate or depress the economy and can be described either in terms of the money supply or in terms of the interest rate. In a rapidly growing economy, the prices of assets have increased making the expected return from owning a home higher than if the economy were not growing so quickly.

When the Fed buys government bonds in open-market operations, it increases the money supply and expands aggregate demand. When the Fed sells government bonds in open-market operations, it decreases the money supply and contracts aggregate demand. "Conduct whatever open-market operations are necessary to ensure that the equilibrium interest rate equals 6 percent (Gregory Mankiw)." So when the Fed sets a target for the interest rate, it commits itself to adjusting the money supply in order to make the equilibrium in the money market hit that target.

The removal of the Federal income tax deduction on mortgage interest would make the cost of owning a home lower and should have been implemented decades ago. If there were no deduction, the demand for homes and therefore the prices, would decrease. The home mortgage interest deduction saves the average home owner thousands during tax time, supports home and community values, and helps American home buyers finally get into their first home.

"Having a tax deduction for mortgage interest makes owning a home more affordable because the deduction lowers the amount of tax you pay. U.S. Census data shows 37% of home owners with mortgages spend more than 30% of their income for housing (Dona DeZube, 2010)." Thus, paying less for the cost of living means that consumers have more disposable income for their savings and other household expenses. Increasing housing affordability also increases the number of renters, as well as renters who can finally afford to buy a home. Bottom line, increasing the number of home buyers helps keep home prices stable for those who already own homes by ensuring a steady and consistent stream of new buyers.

In the past few years we have seen mortgage interest deductions come under attack so in their defense, suggestions for cuts were developed to deal with the deficit in the most effective manner possible. For instance, by "reducing the mortgage interest deduction for upper-income taxpayers, they would only receive 28 cents on the dollar even if they were in a 33% or 35% tax bracket so they could then deduct 33 or 35 cents on the dollar (Dona DeZube, 2010)." In order to "reduce the $1 million cap by $100,000 a year, it would help to change the mortgage interest deduction to a 15% tax credit (Dona DeZube, 2010)." In the past, members of Congress have suggested other mechanisms as well for eliminating or