Free Markets, Free People

Looting Taxpayers: Mortgage Interest Deduction Editon

Government policy is always the unpredictable bugbear of free-marketeers. Yet, while it’s irresistibly tempting for some to lambaste libertarian types as the pie-in-the-sky Utopians, the latest tax policy scheme to come from the Obama administration is by far the most outlandish fantasy around:

The popular tax break for mortgage interest, once considered untouchable, is falling under the scrutiny of policymakers and economic experts seeking ways to close huge deficits.

Although Congress last year rejected the White House’s proposed cut to the amount wealthier taxpayers can deduct for home mortgage interest payments, the administration included it again in its 2010 budget — saying it could save $208 billion over the next decade.

Stop. Think. How is the federal government going to “save” money by charging taxpayers more? Answer: it isn’t. Raising taxes doesn’t “save” anything but the government’s ability to spend more of your money.

And now that sentiment has turned against all the federal red ink — and cost-cutting is in vogue — Democrats on President Barack Obama’s financial commission are considering the wisdom of permanent tax breaks such as the mortgage deduction and corporate deferral. Calling them “tax entitlements,” senior Democratic lawmakers have argued they should be on the table for reform just like traditional entitlement programs Medicare, Social Security and Medicaid.

Again, we need to reject that implicit assumption — i.e. that the money being “saved” is the government’s to begin with. In addition, we cannot accept the equivalence drawn between wealth transfers like Medicare, Social Security and Medicaid, and tax breaks like the mortgage interest deduction (MID). In one case, the government is taking money from someone else (despite how it has been characterized) and giving it to another, while in the other situation the government is simply deciding how much of one’s hide it will charge for its oh-so-wonderful services (a.k.a. taxes). It’s the difference between transferring money from one to another, and refraining from taking the money in the first place.

The new spotlight on the mortgage deduction and other tax expenditures comes as the Obama administration and Congress consider ways to reduce deficits the Congressional Budget Office (CBO) expects will average nearly $1 trillion over the next decade.

And there is the real problem: government spending. Because Congress has been so profligate for decades, we’re all in a real pickle now. In order to cover their own derrieres, the government needs to find new revenue. And that’s where we, the taxpayers, come in.

What’s really happening is a tax hike. Where a homeowner paid X dollars on Y adjusted gross income (AGI) before, that homeowner would be paying X+ dollars on Y + ($ spent on mortgage interest), which equals much greater tax burden.

It is true that this is a “tax break” in that the government is taking less of your money than it otherwise would, and that the tax is not spread evenly across the population. In that sense, there is no question that the “tax break” is not really fair. People who claim that this is nothing more than social engineering (by incentivizing home ownership over renting) are correct. Aside from current tax policy (where interest earned is taxed as capital gains, but interest spent is only capital loss on homes), there really is not any valid reason why owners should be treated differently than renters. The government decided that home ownership was a good idea for “society” and thus the MID was born. But now that we homeowners have been led down the primrose path, how fair is it to push us into a thicket of thorns?

Whatever the fairness, the consequences of ending MID will be drastic at best. Not only would it lower home prices in the midst of a recession, it would cast thousands (perhaps magnitudes more) of homeowners, who are currently paying their mortgages, into bankruptcy almost overnight. And don’t forget, the Bush tax cuts are going to expire on January 1, 2011. That’s a devastating double whammy. Taxpayers will be crushed, tax revenues will sink even further, and the economy may start living up to its unheralded name of “The Great Depression Part II.”

Obviously, I have a vested interest in the outcome of this policy debate. While I don’t really have any problem with ending the MID tax break (and, in fact, find much to commend about it), doing it now, without any sort of grandfather clause, would be a catastrophe. Those who relied on MID when deciding to purchase a home will be left out to dry, many of whom won’t be able to pay their mortgages in the face of severe tax hikes.

Heck, even with a grandfather clause, a struggling housing market won’t be revived by tanking home values and discouraging ownership. The only realistic result will be to, at best, trap people in their current homes and make prospective purchasers quite wary (if they could even get a loan).

Regardless of my personal interest, the impetus behind this idea is positively ludicrous. No matter what anyone says, it will not raise tax revenue. Instead, it is destined to lower them, along with the standard of living for Americans in general. Citizens who have invested in homes only to find that they are now ratcheted up into a much higher tax bracket are not likely to continue paying for those homes, nor to keep their incomes as such a level as to be penalized. People really do respond to incentives.

Whether or not this trial balloon floats, it is a good indicator of what’s to come. A government without revenue is like a starving beast on the prowl. It needs its sustenance, and it will find a way to feed, by force or guile. As I said a few weeks ago:

No matter how ingenious the plan, or divine the motives, the only way for governments to fund the welfare state is to tax the wealth-creators. As even the most Marxist of intellectuals knows, if you want less of something, then tax it. This is why cigarettes are levied against in ridiculous proportions, and why carbon taxes are considered (by some) to be the savior of our planet. Well, taxing wealth-creation works exactly the same way: tax it more, and you will get less of it. Which leads to the inexorable conclusion that, as the governments of the world sink deeper into fiscal crisis, the looters will be coming en masse.

This is the first wave of the looters. Expect more.

18 Responses to Looting Taxpayers: Mortgage Interest Deduction Editon

  • Yeah, I question this move as it would instantly generate foreclosures in some cases.  And it others, the value of their homes would drop enough that foreclosure becomes an option for them.
    Because of the mortgage rules, home prices have pressure against gaining value.  So any drop, even normally a temporary one, won’t reverse quickly.

  • What I find most discouraging about this post is the complicity of MiniTru.  The Hill appears to be going right along with the ideas that the government “cuts costs” by raising taxes, and that there’s absolutely nothing wrong with this.  Look at the “experts” cited:

    … administration included [ending the MID] again in its 2010 budget — saying it could save $208 billion over the next decade. [Save for whom, exactly?  It’s certainly not going to save jack for people who will suddenly find themselves paying hundreds – perhaps thousands – more in income tax.]

    Calling them “tax entitlements,” senior Democratic lawmakers have argued they should be on the table for reform just like traditional entitlement programs Medicare, Social Security and Medicaid. [emphasis mine – dj505.  Note the use of the word “reform”, when what is really meant is “elimination”.  And how do you get to a place where letting people keep some of their own money is an “entitlement”?]

    The proposal will correct inequities in our tax code that allow millionaires to benefit from higher itemized tax deductions than middle-class families enjoy,” said Meg Reilly, spokeswoman for the Office of Management and Budget (OMB). [Ah, yes: demonizing “the rich” again.  DAMN those rich people for having larger mortgages, paying correspondingly higher interest amounts and thus getting large tax breaks than the rest of us!  We’ll teach THEM to buy big houses!]

    A Brookings-Urban Tax Policy Center study found that the mortgage interest tax break costs more than $100 billion annually but does little to encourage the middle class and less wealthy to buy homes. [OMG!  Liberal think-tanks did a study that found (gasp!) that higher taxes won’t bother people?  Knock me over with a feather!]

    Gregg and Wyden said they left it out because they wanted a “politically viable vehicle,” conceding that ending the mortgage break would mean less support for their plan from other lawmakers.   [See!  See!  The only reason that even Republicans want to keep the MID is politics!]

    Ending all of those permanent tax breaks would be one way of reining in debt, according to a report by former CBO Director Rudy Penner and other economists at the National Academy of Sciences. The other way to stop a rise in the real debt level without cutting Medicare, Social Security and Medicaid would be to increase all base tax rates and introduce a new value-added tax, which is levied on goods at each stage of production. [BOHICA!]

    My thought is that the writer, Alarkon, is nothing more than a cheerleader for the regime and its efforts to get more money.  He smoothly and slickly interchanges terms like cost, deficit and debt, leaving all but untouched the idea that the government actually reduces costs by CUTTING SPENDING, not by raising taxes.  Deficit and debt are mentioned as bugbears: “Gosh, these things are getting out of hand and people are actually starting to grumble.  Guess we’ve gotta raise taxes.  It’s the only thing we can do.”

    Bend over and grab your ankles, folks.  Uncle Sugar needs money, and he’s gonna get it, one way or another.

    • Along those lines, the vote last night to allow the EPA to tax CO2 is not about CO2.  It is about revenue.  Cap and Trade is not about emissions.  It is about revenue.  The advantage these two have over a VAT is they are not obvious taxes in that they are justified based on environmental concerns.  But, when all is said and done, any revenue will not be spent, other  than coincidentally, on the environment.
      BTW, has anyone ever checked to see if the Pelosi increased cigarette tax actually did fund the increased cost of SCHIP?  My bet is that it did not.  Paygo is just anther political lie.

      • Rick CairdPaygo is just anther political lie.

        I increasingly feel like the world has turned into 1984.  We are lied to so routinely that it’s difficult to believe anything (hell, we’re even lied to about lies: they are called “spin” or “massaging the numbers”).  Instead, we’re reduced to trying to guess just how much people are lying.  “OK, he said he’d raise this by 5%.  Will he raise it by only 3%?  Or will he actually cut it?”

        This sort of thing also damages the prospect of any productive dialogue between opposing parties because all can find various statements and “facts” that support their own side and contradict claims made by the others.  Witness the recent debate over the health care takeover: everybody had his own set of facts and “experts” such that, depending on who you asked, health care takeover would either be the greatest thing in US history… or else cause the universe to collapse.

        MiniTru, which in principle should give us unbiased facts and expose the spin and lies, is generally complicit in weaving this fabric of lies.  In some cases, the complicity is a sin of omission: reporters don’t really understand their subject and so must take at face value the facts and opinions of the “experts” they interview.  However, in most cases, I believe that the sin is one of commission: the reporters have their own bias and agenda and deliberately pick and choose what “facts” are reported in order to bolster their cause.  I think the article cited by MichaelW is an example of this.

  • The next republican presidential candidate has to run on a workable platform to curb spending,  I propose something like this.  I call it the 4-4-1-1 plan for entitlements, (and it can be modified to use for the entire Federal Budget)  The first 4 is an across the board cut of 4% in everything, disbursments, payroll, everything.  It could be sold to the American people on the basis that since everyone has been having to tighten the belt then those dependent on government can find a way to tighten the belt also for a measly four percent.
    The second 4 is four a four year absolute freeze in government spending. Everything, every agency budget is frozen in place. Some can be cut by congress if they have the ability, but nothing can be increased for any reason.
    The first 1 is for immediately raising the age of eligibility of all programs by one year.
    The second 1 is for a one percent rise in the FICA tax, (something for everyone, you can’t close the deficit with no new revenue)
    Some modification of this program would have a good chance if it was championed during an election year. We have to get serious and make some hard choices.  In my view such a program, if coupled with some modest growth in the economy would go a long way toward making a dent in our deficit problems. (along with reducing a lot of our foriegn troop commitments, which we can no longer sustain. Why in the hell do we still have nearly 60,000 troops in Germany?)

    • Kyle, the plan has some potential.  There would need to be provisions for spending for true emergencies such as a gulf oil spill or another 9/11.  Politicians, of course, can drive a truck through an “emergency” hole, so it would need some kind of super majority to declare an emergency.

    • Sounds good to me.

  • The irony of them working SOOOOOOO hard to make sure everyone HAD this deduction through home ownership that they were willing to make home loans to, well, my two dogs could probably have qualified…is beyond words.  They destroyed the economy over home ownership and now….
    Any moment now I expect Ralph Cramden and Ed Norton to show up and explain the joke. 

    Is there anyone, anyone, who at this point isn’t willing to consider the possibility that there were Mancurian Candidates planted all over the United States?    And when they’re done, they’ll blame it all on us. 

  • I realize government promises are worthless.  But, the mortgage interest deduction, as Michael points out, has been in the tax code since my first house in 1969 and much earlier than that.  It also survived what was billed as the Reagan tax simplification giving us lower tax rates accompanied by reduced deductions.  There are many people out there whose financial evaluation of a home purchase included, and required, the mortgage interest deduction.  They have that factored that deduction into their income tax withholding.  Without it, there will be more bankruptcies and foreclosures.  Great, just what we need.
    Second, we can look for an immediate reduction in the value of real estate to reflect the changed cash flow picture.  Wonderful, we will have more foreclosures, less available cash for homeowners, and reduced real estate values (which will cascade into local property taxes for state and local governments).  What could possible go wrong.

  • This proposal is on par with the tricks of the Clinton Administration to balance the buget by dropping funds for the VA that they knew would be restored by Congress.
    Just wait for the “false choice” between the mortgage interest deduction and a VAT (or some other nonsense).
    Then just say NO.

  • As noted above, this is consistent with the idea that our money is, in fact, the FEDERAL government’s.  That is a notion that HAS to be killed.  Dead.  Permanently.
    When?  Very soon.  How?  I think a revolution is required, though not violence.  We have better tools.
    Until that happens, we are so screwed…

  • With all due respect, “first wave” my ass. Fourth, easily; TARP, auto bailouts, medical bill. How polite of them to skin our hides and only charge us later.

  • Heh.  Good point.

  • Phase in the removel of the mortgage interest deduction (“MID”) over five or so years so that people have time to adjust. Think it through, folks, the MID is just another example of social engineering through the tax system. It does not make housing more affordable, it simply raises the price. Get the feds out of the housing market. Remember the great hue and cry when the 1986(?) tax plan removed the consumer interest deduction? The auto industry was going to collapse, retail sales would plummet, locusts would invade, dogs and cats would be living together, and so on. It did not happen. If you are so close to the edge that you need the MID to make your cash flow work, you are too close to the edge. People with large MIDs are already getting shafted with phaseouts and the AMT. People with lower MIDs could probably cover it by dropping their cable tv or switching to a prepaid cellphone plan.

    Somebody is going to whine “Well you don’t have  a mortgage so you are just being mean!” My first house had a 7yr ballon that I double paid to get the balance down before it “popped”. My current house is in the last 2 years of a 15yr mortgage that I have double paid as well. I did not buy more house than I could afford. My father once told me “Never base your investment decisions on taxes”.

    • Respectfully, how would a phased approach do any good?
      I recall the end of the investment tax credit, and the ensuing savings and loan collapse.  That seems like a really dark portent, just like the recent housing bubble.
      I agree, generally, that there should be NO tax-based tinkering in the economy.  But I insist that our entire tax system needs to be stripped down to bear wood, and NOBODY in our government seems to have that on their plate.
      You are to be congratulated for your wise living; not everyone is as wise…nor are their circumstances set in stone.  Sometimes we make decisions on the best information we have, and a change  DOES put us close to the edge.  I cannot see how it is prudent for our government to try  to balance a budget by such measures as we discuss in this thread.  I think there is a clear mechanism that will lead to lower revenue, in fact, while damaging millions of individuals.

    • I am opposed to doing away with it, social engineering or no, because, number one, we have to get a handle on spending first. Because any new revenue will just be spent, and number two, it will, even if phased out, put a whammy on the already ailing real estate market.

  • It is already being phased out by the COLA adjustments to the standard deduction.  The benefit of the mortgage interest deduction and the property tax deduction go down more everytime the standard deduction kicks in or the AMT applies.