Question

In 2010, the co-chairmen of President Obama’s deficit reduction commission proposed curtailing or eliminating many tax deductions such as the one for mortgage interest. Economists who favor the proposal argue that it would (i) correct a misallocation of resources because too much of the economy’s capital stock is tied up in residential housing and too little is invested in corporate capital. (ii) cut both spending and taxes. (iii) encourage private philanthropy.

Answer 1

Answer:

(i) correct a misallocation of resources because too much of the economy’s capital stock is tied up in residential housing and too little is invested in corporate capital.

Explanation:

Among the options, the only one that makes sense is the first one. Cutting deductions from a sector - such as real estate - means that the government will be raising tax revenue - fiscal policy. In fact, historically the mortgage industry is a beneficiary of tax deductions.

The fiscal budget is limited and is allocated in sectors where the government deems it necessary. Therefore, withdrawing the tax deduction of the mortgage industry is a way of reallocating these resources to other areas, such as to stimulate some productive sector of the private sector.