By: Charles Baird
The widespread acceptance of progressive taxation of income has emboldened the Biden Administration illegitimately to impose progressive mortgage interest rates.
The federal government imposes a progressive income tax. It is called “progressive” because the tax rates increase as a taxpayer’s income increases. Higher-income people pay higher tax rates than lower-income people do.
On April 20, the Biden Administration announced that starting on May 1, Fannie Mae and Freddie Mac mortgage lenders must charge “loan-level price adjustment” (LLPA) upfront fees to people with good credit scores. That surcharge will be converted into a higher interest rate for the loan, effectively used to subsidize borrowers with poor credit scores. Since credit ratings are positively correlated with income levels, Biden’s FHFA rule imposes progressive interest rates.
Some commentators have questioned the FHFA rule’s incentive effects, but no one seems to have questioned its legitimacy. What is the underlying principle that justifies such a facially discriminatory policy? I think the lack of concern about legitimacy is due to the fact that almost all commentators, even economists, have, for far too long, uncritically accepted the legitimacy of progressive income tax rates.
Most politicians justify progressive income tax rates on the basis of one’s ability to pay. But this simply says, “If you have it, we will take it.” There is no limiting principle. Politicians assert the power arbitrarily to determine any individual’s ability to pay. Your “fair share” of taxes is the amount that leaves you with the income they think you should be permitted to keep, regardless of the harm that your tax burden does to you. This is simply unprincipled brute force.
Most economists justify progressive rates with a more sophisticated, albeit fallacious, argument. It goes like this: people with high incomes place less significance on losing, say, $500 than people with lower incomes. To low-income people, a $500 loss is likely to be a heavy burden, while to high-income people, that same loss is not so much of a burden. Economists call this the principle of declining marginal significance (or utility) of income: As income rises, the significance one places on getting a specific amount more, or losing that specific amount, declines. This is an intuitively reasonable proposition. It doesn’t, however, justify progressive income tax rates.
https://www.citizensjournal.us/progressive-interest-rates-really/?utm_source=feedly&utm_medium=rss&utm_campaign=progressive-interest-rates-really