Free Markets, Free People

Mortgages, “tax expenditures” and jujutsu

I disagree with one point in Michael’s otherwise fine post about the mortgage interest deduction.  It’s something I hear frequently from fiscal conservatives, and it’s a nice sentiment, but we need a better argument.

Michael writes,

…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.

But targeted tax breaks aren’t really different, in practice, from subsidies.  The numbers would work out the same if the feds cut checks each year to people who hold mortgages, but we think of the tax break as allowing people to preserve their status quo, while we think of the subsidy as an intervention.

Somebody always has to pay for government spending.  A targeted tax break just means the government is going to force other taxpayers to pay for the spending, and when we’re running a deficit, that means future taxpayers.

I anticipate the counter-argument that if we send Congress more money to cover deficits, they’ll just ramp up their spending until they have equally large deficits again, so we won’t “save” future taxpayers a dime.  I have two responses:

  1. That sounds like a fine argument for requiring balanced budgets.
  2. It appears that nothing short of catastrophic deficits motivates politicians to cut back on spending, and even that is an iffy proposition, so if fiscal conservatives are serious about governing, we  need a better strategy than holding the Alamo on taxes.

What’s important for small-government tax policy is that taxes should (1) make people sensitive to increases in government spending (requiring balanced budgets helps), and (2) be simple and broad-based, not a tool for tinkering with social policy.

On the latter point, maybe I should give credit to Democrats for trying to undermine some of the biggest obstacles to the flat tax: the employer health benefits exemption and mortgage interest deduction.  I see potential for some political jujutsu: Republicans can let the Democrats take the heat for killing the deduction, and just push for other flat-tax provisions that tend to compensate the losers.  Lose the battle, win the war.

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22 Responses to Mortgages, “tax expenditures” and jujutsu

  • “Republicans can let the Democrats take the heat for killing the deduction, and just push for other flat-tax provisions that tend to compensate the losers.  Lose the battle, win the war.”
    If it were phased in slowly–and I mean phased in over a significant fraction of the lifetime of usual mortgages–then that might work out very well.
    Likewise, ending the “the employer health benefits exemption” should be done over many years, and only if employers are required to turn over the entirety of their per employee health costs to the employee as an increase in wages–their labor was worth the costs when the exemption existed, they should have the value when it doesn’t.

  • Well the other argument is that if you strip mortgage interest deductions now then the already anemic real estate markets will crash again.
     
    Look, now is not the time to go monkeying around with this sort of thing, that is something you do when you already have a strong economy and have reduced deficits.

  • I would bet there are very few people who aren’t enjoying a ‘subsidy’.  I’m not married or have children.  So anyone getting a higher deduction because of dependents is getting a family subsidy.  Roads, wildlife management, FCC, and several other goverment programs [supposedly] benefit people which ware not at all used equally.  They are all getting subsidies.
     
    Just like the examples above, everyone can buy a house and enjoy the same mortgage deduction.  It isn’t like one person is being singled out over another person.
     
    And yes I agree with the argument the government will endlessly increase their revenue and only damper on them doing so is political cost.  So if they can cast increases where they can get people on board to support them, taxes overall will be higher faster.  Basically the government could use envy to get political support for 100% taxes on us all eventually.
     
    The same impulse that cause people to begrudge others getting a brake is the same impulse used to sell socialism and communism in the name of what is fair.

  • Ultimately the only solution to all this is: a) a restructured tax system, probably a progressive “fair tax;” and b) rethinking of spending program by program with major cuts, as well as “sacred cows” slaughtered.  Neither left nor right has the stomach for this…yet…

    • We already have a progressive tax.

    • And the cowardly Erb declines to point out any actual programs he would cut. No doubt because if he did it would expose him as the leftist he is instead of the moderate he pretends to be.

      Anyone noticed how his preachiness has really ramped up since he came back from Europe? He’s like a pilgrim who has visited the mother shrine, and had his religion renewed and refreshed. After all, Europe is the mother shrine for his preferred religion – post-modern leftism.

    • The big problem with the “fair tax” is that it won’t work.  Every country that’s tried a national sales tax has switched to a VAT, which is actually very similar to a flat tax in what it ultimately taxes.  The reason the sales tax won’t work is that taxing everything at the point of sale requires one very high tax that makes it extremely tempting to evade taxes by smuggling, theft, black market sales, etc. (especially on high-ticket items), which then requires the government to raise the tax rate to compensate, which again increases the incentive to evade it.

      And yes, neither the Left nor Right (at least in Congress) has the stomach for the required program cuts.  Which ones do you have the stomach to cut?

    • This isn’t about rearranging the chairs on the Titanic.  Reshuffling the sources of taxes always comes back to the same place … there isn’t enough money.    I’ve watch this same “movie” for the last few decades here in Pennsylvania with “property taxes.”  I always comes back to they need at least as much as before from the same tax base.  There is apparently some mythical source of taxes (like that “magic food” that tastes great and isn’t just low cal but takes off pounds) that continually goes missing.
      All the crap … and it is just that crap … about a “fair tax”, a “flat tax”, a “progressive” tax, a “unicorn tax” … “fair” for who ?  “flat” for who ? “Progressive’ as compared to what ??  What “unicorns” ?
      So for landsakes, give it a break.  If you don’t want to volunteer to send in more money now … there will be cuts.  Your chance is now to stop them.  Send in a check or money order.
      So we are left where ?   I think this about sums the problem up …

      CONNOLLY: I’m telling you, they don’t have an open mind. They have publicly expressed that they do not favor — you know, they’re all for deficit reduction as long as anything having to do with revenue is off the table. Can we get to serious deficit reduction — change that trajectory you talked about — if we eliminate half of the ledger sheet?
      BERNANKE: Well, theoretically you could if you cut enough, but it would be very difficult to do that.
      CONNOLLY: Is there enough spending to be cut?
      BERNANKE: Of course! I mean … [laughs]
      CONNOLLY: National defense, homeland security?
      BERNANKE: That’s your judgment, that’s the Congress’ judgment. That’s not my judgment.
      CONNOLLY: Ah. Um … it must be nice to be an economist.

      Politicians in this country have lost sight of what government jobs are a about … it’s public service. It’s not easy.
      Instead they seem to think being a Congressman or Senator is the best thing close to being royalty. This is the equivalent of wishing to live in Medieval Times, but of course not as a serf.
      If they don’t want to make hard decisions .. become an insurance salesman for gosh sakes.
      The same goes for our “Whinner in Chief”

  • One essential element of any federal tax system for a free people is that is have NO…NONE…effect other than to raise revenue for constitutionally mandated government.  Any tax which had that design…or that effect…should be struck down.  I know…we’re only light-years away from such an ideal, but, hey…
    I have to take small exception to your premise that positive transfers are the same as deductions.  They are not, either as a psychological matter or in practical terms.  There are costs that attach to a positive transfer that you can see will make a taxable $1.00 much less than what would be re-distributed in a positive transfer.

    • There are administrative costs to the mortgage interest deduction (ask the IRS), just as there would be in cutting checks to everyone who holds a mortgage (actually, the IRS does cut checks to a bunch of them).  The latter might be less efficient than the former, but my point stands that the effects of a targeted tax cut and a subsidy are essentially the same.

  • Kyle is right. Revoking this tax break would crash the market. This is not the time for this sort of thing.

    • But its the perfect time.  I’ve come to the conclusion that Obama wasn’t to destroy your savings and any incentive you have to save.
       
      And for many people their home is a partial investment they plan to leverage come retirement age and stepping down to a smaller home in a cheaper area.  Its not just a place to live.
       
      Well perhaps its not conscious.  Perhaps its the consequence of never having to save himself and having no respect for the need for others to do it.  Because taking care of you is the job of the government.  Saving for the Future and Nanny State are contradictory principles.

    • How about reducing it by 9% of the effect today, and doing so for 11 years into the future?  (Well 10% the last time).

  • I’ve come to the conclusion that Obama wants to destroy your savings and any incentive you have to save.

    Anything and everything to make the individual more dependent upon Big Brother – i.e. the Government – for all of our lifetime, yearly, and even daily needs.  For when we all depend upon government largesse, we are reluctant to make waves.  Public Docility becomes the ojective.

  • I’ve got a truly radical idea on taxes and revenues.  Given the current balance sheet is so screwed up, it might work.
    Everybody should prepare their taxes next year the same way they did this year but when it comes time to determine our tax liability, we should put down a value, a portion or our income, that we think is “fair” for a government to operate.  The IRS can then tally it all up and the Congress and President will only get to spend that much.
    Wow !!!  A truly volunteer system.

  • “Somebody always has to pay for government spending. A targeted tax break just means the government is going to force other taxpayers to pay for the spending, and when we’re running a deficit, that means future taxpayers.”

    Except tax cuts tend to increase government revenues by increasing liquidity and encouraging investment. So the tax cut actually pays for its self, up to a certain point on the laffer curve.

    • As I said, there’s no real difference between a targeted tax cut and a subsidy.  So if you expect a targeted tax cut to “pay for itself,” you’d expect the same from an equal-sized subsidy.

      And as far as I can tell, we are not currently on the right side of the Laffer curve — tax cuts will tend to decrease revenue.  There are still plenty of things to like about tax cuts, but right now their effect on the deficit isn’t one of them.

      Besides, do we want our main argument for tax cuts to be that they maximize government revenue?

      • In reverse:
        1)  We want our main argument for tax cuts to be effective.  Also tax cuts now will decrease revenue now.  Okay.  This will A) lay the foundation for increased growth and B) hasten the day spending must be cut.  The deficit is not without relevance, but it is a symptom and not the problem, and will eventually solve the problem of too-large government if nothing else will.
        And if nothing else will, it will still be better than that alternative.
        2)  I agree with you that, ” there’s no real difference between a targeted tax cut and a subsidy. “

  • Switch to a flat tax with a big personal deduction so its progressive. Make its slightly lower than it is now, so not so many people will complain about losing their mortgage interest deduction. No chance Obama would pass it though – not enough room for them to play social engineer.

  • Politicians have insulated themselves from public scrutiny and increased voter apathy by making increasingly larger blocks of voters exempt from paying income tax – they have no skin in the game. To correct this I would suggest a new tax bracket – at the bottom. 1% before exemptions and credits or perhaps paid on income subject FICA taxes. An individual or family with an annual income of $30,000 would pay $300.00 or $25.00 a month. The amount wouldn’t pose a hardship for anyone, but it would give people a stake in what government spends since it would be their money being spent.

  • If you think about it, it’s a home ownership mandate, isn’t it? It’s the same as the health insurance mandate, only phrased differently.
    Either you buy a house, especially one with high interest, or we tax you more. (And isn’t that a killer? You get more credit for wasting more money on interest…)
    While I’m for getting rid of this particular carrot and stick, if you think the foreclosure rate is high now, what happens when people suddenly have to pay thousands more in taxes in order to keep their house? I don’t think it would be pretty. Some sort of phaseout or grandfathering would be required.
    Note: I rent. But even I see that an immediate end to the mortgage tax break would be disastrous. I want it and SS to go away, but I understand that people made important decisions based on those being the rule, and I can not in good conscience screw them over, even if it would theoretically be better for me. Sadly, I think I’m pretty rare that way.