Saturday, September 27, 2008

Connection Between the Two Most Messed-Up Industries

I would have to give the housing industry, especially the financing side of it, and health, again the financing side of it, as the two most problematic industries in the country.

Is there possibly a common factor leading to problems in each industry?

Well, one candidate would be tax deductibility. Mortgage payments, and real estate taxes, are deductible from Federal income taxes, and provision of health care benefits by employers are not considered taxable income.

Such deductibility raises demand for these products/services by about 25% and causes distortions in how they are paid for (encouraging borrowing and encouraging payment by employers).

Using this as a predictor of future industries that will have problems, I guess I would have to point to two: one, retirement pensions, and two, education. As for pensions, contributions up to certain limits are deductible, and as for education, we have the relatively new 529 Plan industry, with 529 Plan investment earnings being tax free.

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