Interesting but misguided analysis
Two thoughts immediately spring to mind:
"Take mortgage-interest relief, a policy that's supposed to boost home ownership. More than half of this subsidy flows to the top 12 percent of households with incomes over $100,000; the poor get very little. This absurdly regressive policy doesn't even promote its objective, since affluent families would own their own homes anyway."
An interesting point, however the problem is that the current market is built on a foundation of mortgage tax relief. If you repealed it outright (as he seems to suggest) then you're going to totally screw all those middle-income homeowners. "The rich" will just swallow the additional tax burden, but the middle class will bail on mortgages like you wouldn't believe.
Two better approaches - either grandfather existing mortgages, or put a cap on the benefit. (i.e. mortgage interest is a deduction up to $15,000/year)
This one, however, seems to completely misunderstand how things work:
"Again, this absurdly unfair system doesn't even promote its objective, since the rich tend to save anyway, whether or not they get tax subsidies. Meanwhile, poor families that are not saving don't get the incentive to do so, because so much of the tax break is funneled to the rich. A chance to boost national savings is wasted."
I don't get his last two sentences - some kind of implication that because higher income earners are taking advantage of the 401(k) it actively hurts lower income earners? How?
I kind of wonder if he realizes how little tax is paid by lower income earners anyway, and that cutting those taxes wouldn't be such a huge benefit (welcome, yes, but not going to fund a new car this year or send kids to college)
For example, a family with two children earning $30,000/year (median income in the US) has no tax liability. So what exactly do tax cuts get them?
September 5th, 2006 9:06am
Yes, he's an idiot. Tax cuts buy the poor fewer services, lower teacher salaries, smaller police forces, less access to college -- since all of these services are funded by taxes.
The mortgage interest deduction makes it possible for low income people to afford a house AT ALL. Note this deduction is ONLY for your personal residence. To call this regressive is to turn the meaning of the word on its head.
September 5th, 2006 9:11am
The mortgage interest deduction is grossly unfair, since it benefits only the wealthy. All the lower income families in rented apartments get no equivalent tax deduction on their monthly rent bill.
Note that the mortgage interest tax deduction was completely phased out in the UK some years ago and it didn't stop people buying homes or upset the housing market. Today, few people remember it was ever available.
September 5th, 2006 9:22am
The fact that there is a mortgage interest deduction pushes up housing prices. Making it harder for poor people to buy a house. If the deduction were capped at 15K, upward pressure on housing would be less and tax revenue would be more, to pay for all those things SomeBody recommends.
How much tax is paid by a family with two kids making 60K?
September 5th, 2006 9:25am
This is a big issue in the Netherlands every election.
Mortgage interest deduction may not benefit the poor per se but cancelling it will certainly hit Joe Average Homeowner hard.
Maybe the housing market will find it's equilibrium after a while but not after bankrupting thousands of ordinary people who can't afford to buy a house without it.
The mortgage interest deduction *used* to apply to every house you owned, until that was changed in the 1986 tax reform act. That change screwed huge numbers of investors as that decade's housing bubble was deflating, and when combined with the S&L and energy busts, clobbered housing across the US. My ex worked for an apartment holding company who's business model was broken by that act, causing every one of their apartment complexes (we lived in one) and their hotel chain to go into Chapter 11.
Many Savings & Loans ended up owning (through foreclosure) large numbers of homes and office space. To minimize the drop in real estate prices, they held onto many of them. Sadly, many of those same S&Ls were in financial difficulty due to other poor investments, as a result, when the troubled S&Ls ended up in liquidation, all the properties they tried metering out flooded the market instead. Some of the neighborhoods here in Denver lost 80% of their prices between the beginning of the 80s and the mid-late 80s.
The new pension "reform" and wallstreet welfare act will make 401k plans standard for everyone, unless you act to opt-out of them. This is the opposite of current behavior where you are excluded unless you fill out paperwork to opt-in. It continues to discourage defined-benefit plans (aka traditional pensions) while pushing all risk onto the private individual by also making it harder to recover fraud and peculation from wallstreet and the mutual fund companies.
September 5th, 2006 9:59am
In Canada there's no deduction for mortgage interest except for investment property. Which is why we refinanced and paid off all our mortgages except for the one place that we rent out.
September 5th, 2006 10:02am
The mortgage interest deduction raises the prices of houses for everyone but benefits only those who pay taxes (ie, not lower class) and benefits those in the highest tax bracket the most.
Hence it's regressive.
September 5th, 2006 10:19am
Good conversation going here. I agree that killing MIDs would smite the middle class a grievious blow... but something has to be done. However, for all of its regressive tendencies, here in the states it really is the 'American dream' to own a home, and there are several mechanisms enshrined in law and practice to encourage home ownership, the MID being just one. 30-year mortgages, if I understand correctly, are a rarity in Europe, and the 2-year residency exemptions on capital gains seems to have few counterparts elsewhere.
Which brings up a larger point--is it really possible for the government to encourage home ownership in the broadest sense--i.e., for all socio-economic classes? Directly, the government only has crude tools at its disposal--tax and interest rates--mechanisms that by their very nature tend to disproportionately benefit the rich. Couple this with the complication that homes in the US are far more than domiciles--they're also the lynchpin of most people's retirement--and you have a volitile situation indeed.
I guess I'd start reform with something more fundamental--like a nationalized retirement plan and health care--to ease the burden on the real estate market.
I'm mostly thinking of the situation here in Canada, but my next comment probably applies to the US, although you are way less beaurocratized in some things than we are...
There are so many laws and regulations related to economic activity that ANY specific change can only have a small overall impact. There's some transient effect at the time of the change, but the steady-state settles pretty quickly.
If the mortgage interest deduction were taken away, people would still buy real estate - they still do it here, with insane $1000/sq.foot apartments.
If you want to see significant change, you'd have to have a government do something like a flat tax, or Paul Fisher's idea of a tax on assets w/ a high minimum exemption.
September 5th, 2006 12:20pm
I guess home ownership is good in the sense it forces people to save.
In the US the home construction industry has traditionally been a vehicle for immigrant integration.
September 5th, 2006 1:10pm
"ANY specific change can only have a small overall impact. There's some transient effect at the time of the change, but the steady-state settles pretty quickly."
Perhaps in general. The problem here is that a mortgage is the largest single payment/investment a lot of people have. Unfortunately, housing and mortgage products are priced with the expectation of the MID. If you do away with it, you're hammering people with a massive tax increase while doing nothing about the burden they still have - the house is the same price, the mortgage is the same amount at the same rate.
AND, since housing prices will have to drop to compensate for the loss of the MID, then you've got a bunch of people with mortgages, a loss of income, and dropping equity in their homes.
Honestly, I think it would be a bloodbath of foreclosures and bankruptcies.
Again, I'm not saying it's not worthwhile or not doable - you just have to plan for the transition.
September 5th, 2006 2:27pm
how about phasing out MID on new purchases? the british posters said it was done in Britain with neglible pain.
September 5th, 2006 2:41pm
Yeah, that's what I meant by "grandfathering" - existing homes are deductible, but new homes aren't. You may still get some heartache as people try to sell homes, but I think it's manageable. (In fact, you could grant a tax credit on the capital loss in that particular situation and it would be almost perfect)
September 5th, 2006 2:46pm
"how about phasing out MID on new purchases?"
Problem is, it would affect the current housing market too much. Too many people are WAY too far in debt for their houses, and the thought of anything that could even possibly harm their equity will be violently opposed. I'm more and more convinced that as long as houses aren't merely homes--as long as they are investments and retirement plans as well--we won't see any reform.
perhaps it's better to wait till the next housing appreciation cycle before scaling down MID. a -5% devaluation in a stagnant year hurts a lot more than having one's property go up only 20% as opposed to 25% in a boom year.
perhaps the Brits and Ozzies got lucky with their de-MID-ization.
September 5th, 2006 2:56pm
I suspect that if MID were phased out, then real estate would end up in a screwy situation like it is in CA. Apartment and office buildings are almost universally owned by companies due to quirks in how Proposition 13 was crafted by Grover Norquist (you'll hear his name a lot if/when you study neoconservatism or the republican party). The gist is that property taxes can only go up when a property is sold. If the parent corporation is bought/sold, the underlying property that the shell company owns does not count as being sold, so the tax basis never changes.
I'm pretty sure that some fast talking lawyers could come up with a shell company scheme to pass that write-off through to the owners of the shell company.
September 5th, 2006 3:49pm
Proposition 13 also discourages home owners from selling, since if they move home their property tax will skyrocket. This must restrict supply in the housing market put upward pressure on prices.
Proposition 13 is grossly misguided, and is an example of why the population at large should not be allowed to propose laws.
September 5th, 2006 7:37pm