Free Markets, Free People


Democrats talk mortgage deduction elimination

You crank up Turbo Tax and you begin doing your taxes. About half way through, the sweat is beginning to form on your upper lip. You wonder, after all that’s been withheld during the year, how you could owe what TT says you owe at the top of the screen.

Then you get to the deduction phase and you plug in your mortgage interest deduction. Suddenly your angst disappears. The amount owed tumbles, in fact, it might even go in a positive direction. Thanks goodness.

Well, Bunky, if the President’s commission on have their way, that sweaty upper lip will be a permanent fixture for your tax preparation work day. They don’t like it, they’d rather eliminate it than any spending, and they’re talking about doing away with it:

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.

I can’t imagine a more unpopular thing to do for a citizenry and electorate that already feels hard pressed when it comes to taxes. And comparisons with the taxation levels in other countries really has no bearing, since it is the level of taxation the citizens of this country are willing to bear that matters. And they’ve made it plain that they feel they pay plenty in that department.

Others will argue that government has no business subsidizing home ownership. Valid argument to a point. Government has no business in the pension for life (Social Security) or provision of health care (Medicare and Medicaid) either. So, while some may call it a tax entitlement and even a subsidy, some might see it as a method of recovering some of their tax dollars from a greedy, wasteful, intrusive and out of control government. They might be willing to give it up with commensurate spending cuts, superflous agencies and departments being closed, and government slimmed down dramatically.

But until they actually see that happen – no promises, no smoke and mirrors, no bureaucratic sleight of hand – no sale. Government gets to go first. And when the public sees their total income taxes go down to a level that would make giving up that deduction “revenue neutral”, then they’ll be more inclined to end it.

Instead, what we expect to see is a familiar pattern. Government will pretend to plan for “cuts” in spending (which will never materialize) and pretend to take a stab at trillion dollar future deficits. History says they plan on doing what Congress always does – promise but never accomplish the actual hard work of cutting back spending and government. What Congress always manages to accomplish, however, is taking the money promised by the elimination of this deduction and spending it.

The citizenry should say “no”, not until government goes first and only we see commensurate deep cuts in spending enacted – permanent cuts – is this on the table.

~McQ

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34 Responses to Democrats talk mortgage deduction elimination

  • I would be willing to bet that, if this is passed, one of the biggest unintended consequences will be an increase in strategic defaults. Reduce the already decreasing incentives to home-ownership and couple that with change in attitude toward debt repayment and how living up to your obligations reflects on individuals these days and you could see a housing market collapse of staggering proportions.

    • Absolutely right.  Why should anybody pay his mortage when:

      (A) He’s paying on a house that is not worth what he paid and will likely never be again in his lifetime;

      (B) He’s routinely assured by our national leaders that this is not his fault;

      (C) He’s told that the real villains are predatory banks who suckered him into taking the loan and now won’t help him (i.e. won’t let him off the hook for the payments) as well as greedy corporations who won’t hire him in a job paying him enough money, and;

      (D) He sees plenty of stories and even advice in MiniTru about how other people are bailing on their mortgages and not only avoiding punishment but actually coming out ahead.

      “F*ck ‘em; I ain’t paying” is a perfectly reasonable attitude in such circumstances.

      • Sleeping on the dirt is a perfectly good consequence for making such a choice.

        • I agree.  My point is that society, from the highest levels of our government to our popular media to MiniTru, is pretty much telling people that not only CAN they get away with defaulting, they OUGHT to at least give it some serious thought.  This ongoing, deliberate devaluation of personal responsibility – that would have horrified our grandparents - is killing us.

  • It might push up mortgage defaults because it is going to shrink net personal income by several thousand a year.  More importantly, we had record rates of home ownership only a few years ago.  Now while those rates have certainly dropped because of the economy, but I’m betting they’re still historically elevated.  Why would you piss all those voters off?

  • The dems (and, to be honest, quite a few Republicans) have been playing politics as an end to itself for so long that it’s all they know anymore.  The political game is something like:

    “Well, you teabaggers CLAIM to be in favor of reducing the deficit, but you won’t support this effort to do that???  We KNEW you were a bunch of hypocrites!  So, shut up about the deficit until you decide to be SERIOUS about fixing the problem.”

    Either that, or it’s a question of agreeing to some other sort of tax increase or massively unpopular spending cut: “Take your pick: either we eliminate the mortage tax subsidy, institute a 25% national sales tax, or else granny’s Medicare will have to be cut.”

    What’s never discussed in a serious manner is cutting spending.

    November can’t come fast enough.  And if that doesn’t work, then it’ll be time for pitchforks, torches and ropes.

  • McQ I have to tell you I find it both fascinating and amazing that you fall into the trap of seeing an mortgage deduction as a “home ownership subsidy”!!!  People being allowed to keep money they earn is NOT a government subsidy!!!  Sheech…
    If this is put into practice, say goodbye to the residential housing sector for YEARS.  Home ownership for many is made a rational decision ONLY because of the market distortion of the tax implications.  Remove those implications, and the paradigm will have to realign, and that will take some time.
    MORE unemployment, hard-wired.

    • Home ownership for many is made a rational decision ONLY because of the market distortion of the tax implications.

      Not exactly.  The mortgage interest deduction pushes up the price of housing, too.  Since people can deduct that interest, they can afford to pay more for homes, which bids up the price of housing.  If there weren’t a mortgage interest deduction, you wouldn’t get to deduct that interest, but on the other hand, the size of your mortgage and your monthly payments would also be smaller.  It’s entirely possibly that it’s a wash.  Getting overly excited about that deduction reducing your monthly payments that are themselves inflated because of the deduction raising home prices is rather like getting excited about your refund, even though that’s just giving you back money that you shouldn’t have been paying in the first place.
      Even if it’s not a subsidy per se, it’s still a distortion of the market. In a perfect world I’d definitely get rid of it.  The problem is that it’s very difficult to get rid of. If you get rid of it, by the same argument it will decrease home prices.  Good for renters and those who want to buy in the future, but surely would cause more people to be underwater.

      • It’s entirely possibly that it’s a wash.

        Mebbe.  But that never displaces my point, with which I think you actually agree.  I certainly agree with you…in a perfect world, I would do away with ANY AND ALL social engineering in any tax code.  There is simply no justification for ANY code provision that does ANYTHING beyond collecting JUSTIFIABLE revenue needed for ESSENTIAL government functions.  Social engineering in tax policy is both practically and philosophically abhorrent.  IMNHO…
         

    • What part of “others will argue” did you miss, Rags?

      • Others will argue that government has no business subsidizing home ownership. Valid argument to a point.

        I suppose that is the part I teed off over.  I’m not gnawing on your head, I just found it out of character.  I don’t find the argument valid at all, but that’s me.

        • The validity “to a point” is that whether or not you agree it’s a subsidy, government shouldn’t be subsidizing much of anything. I should have made that a little more clear.

    • It’s a matter of perspective. It IS a subsidy with respect to everyone who doesn’t own a home.  So is any deduction for children with respect to people who don’t have any.  The list goes on and on.  I look at the tax code from this perspective: my taxes are X unless I happen to have a privileged behavior which reduces them.  These are the exceptions to the base tax costs.  Government is subsidizing particular behaviors.   I think it’s a legit perspective but I also think the tax code is a disaster.  I’d prefer a flat tax with some low income exemption.  If that was delivered I’d gladly lose my deductions.

      • Here is my problem with this “subsidy” thing.  A subsidy is a POSITIVE payment, usually by government.  A tax deduction is merely the government saying you get to keep what is already yours.  There is a very significant difference to me.  Calling a deduction a subsidy reinforces the notion that our money belongs to government.  We could agree to say that “Government is ENCOURAGING certain behaviors”, and that would be absolutely true, and more accurate.

        • This is a good point because frankly, being allowed to keep more of your money isn’t a subsidy.

          It might be immoral social engineering, rife with unintended consequences, and wealth redistribution. But a subsidy it ain’t.

        • Positive payment, negative payment, subsidy, deduction – whatever. All the money comes from taxpayers, right? If I’m a renter and I’ve got the same exact housing costs as my neighbor with a mortgage and he pays a few thousand less in taxes just because of that, it’s a subsidy.  It’s a deduction that subsidizes home ownership.  I don’t think calling it a subsidy reinforces anything if we merely keep in mind where the money all comes from in the first place.

          • If you’re a renter, you don’t have the same housing costs as your home-owning neighbor.  If someone breaks out a window, you call the landlord. If the roof leaks, you call the landlord. If the water heater stops heating water, you call the landlord.

            If you own the house, you check your bank balance.

          • So what, you’re arguing the tax deduction is because it costs more to own than rent?

        • Here is my problem with this “subsidy” thing.  A subsidy is a POSITIVE payment, usually by government.  A tax deduction is merely the government saying you get to keep what is already yours.  There is a very significant difference to me.  Calling a deduction a subsidy reinforces the notion that our money belongs to government.

          If some people get the tax deduction but others don’t, then it’s a subsidy.  The people who don’t qualify are being taxed more in order to take the others less.
          Perhaps you’d be okay with calling it a “special renter’s tax” instead?  That would be equally accurate.
          You claim that “social engineering in tax policy is both practically and philosophically abhorrent,” but then you want to get all huffy in defending social engineering in tax policy from using the word “subsidy” to (IMNSHO) accurately describe it.

  • It no longer amazes me that those morons would favor spending billions to encourage home ownership and at the same time favor increasing taxes to discourage home ownership.

  • You’ve all missed it.

    Interest is already taxed because  it’s revenue of the lender.

    Eliminating the deduction double taxes that cash stream.

  • I completely agree with Mr. Thacker above. I have always considered the mortgage interest deduction to be ridiculous. To expand on his points, imagine if the feds gave a $2000 deduction for diamond purchases. What do you think would happen to the price of diamonds? The seller knows that you can pay more so the price will go up. It’s the same thing for real estate.  Canada has about the same level of home “ownership” as we do and they manage to do this without Fannie Mae,  Freddie Mac, FHA, 30 yr fixed mortgages, etc… (I don’t know about mortgage interest deductions). Now for the reality portion of our show: people have made decisions based on this deduction so the feds would have to phase it out over time. For example, allow 80, 60, 40, 20, 0% over five years.

    • No, five years is way too short.  People took 30 year mortgages under the rules that mortgage payments were tax deductible if you itemized.  I  hate it when the government says “Sorry, just kidding”.

  • In the meantime Obama just announced a $400m aid package for Palestine.

    Gee maybe he should cut aid packages prior to cutting deductions on home ownership.

  • I have to say, this would be a stupid step for them to take. Piss off middle America even more and further crash the housing market.

    • Just so.  Re-tinkering with the tinkering is GOING to have MORE unintended consequence…more confusion and more irrational incentive.  The entire tax structure of this nation is an abomination, and needs to be fundamentally changed to resemble one a free people endorse.

      • Re-tinkering with the tinkering is GOING to have MORE unintended consequence…more confusion and more irrational incentive.  The entire tax structure of this nation is an abomination, and needs to be fundamentally changed to resemble one a free people endorse.

        I’m confused about your posts.  You describe social engineering via the tax code as an abomination, but then you’re adamantly against eliminating one of the largest areas of social engineering via the tax code.  Is this simply because it’s one area where you benefit, and you don’t want that change made unless tax preferences that benefit other people are changed as well?
        People talk about hating social engineering through the tax code, but they don’t want to change the biggest ways in which we social engineer through taxes.  In a way that makes sense– the tax preferences that benefit the most people naturally have the biggest political support.

  • I hope they pull the trigger. Its gets us closer to a simplified flat tax and the Dems can get creamed. A twofer. We need to get away from a tax system that tries to micro-manage society not only because a neutral system is better for healthy economic growth, but because micro-management encourages rent-seeking and our Congress critters to assist in that for back-scratching.
    By the way,  the mortgage interest deduction is also a subsidy for people who “own” their home via borrowing rather than own their home via cold hard cash, like I do.
     

  • Also, while I see the point of why you don’t want to call it a subsidy, we really should support a law that says any tax deduction that is not universal should be labeled a subsidy. That makes it clearer what it is, and prevents Obama from saying he “cut” taxes when he actually increased subsidies to people who don’t pay any taxes. So, it should be: Earned Income Subsidy, Child Subsidy, Mortgage Subsidy, etc. Much harder to defend them then when they are called “credits”. You earn credits. Subsidies are given.

  • How about we go to the records on this one, shall we?  I’d surmise that the vast majority of those of us who are carrying the tax burden for this country are home owners and are quite deserving of a few tax offsets to ensure both basic fairness and keep a few dollars to consume products, pay workers and sustain our country’s economy.  When federal, state, local, SS and property taxes well exceed 50% of income I’d say enough is enough, but then again I’m not yet with the socialist program and I still believe incentives are important to a strong economy.    I guess our forefathers had it all wrong. 

  • Good post Dave. If they do a complete overhaul of the tax code AND THEN get rid of the deduction I’m all for it.   If you get rid of it as is, its just one more blow to people who actually pay taxes. 

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