Will hopes that this represents the kind of good policy a liberaltarian can get behind:
Here's something, like trashing ag subsidies, you can get a lot of libertarians and liberals to agree on. It can be a bit disheartening to see just how little this kind of agreement amounts to when compared to the incentives of the politicans. (Iowa's extremely powerful Senators will die in the last ditch for our subsidies.) But I think this kind of wonk consensus building really matters over the medium-term. Democracy is not a mechanical cui bono machine and elite opinion can, when not coopted by the incentives of the parties, work as a countervailing force.
I hope he's right. But I notice something: what do Will and Ezra and I (and for all I know, Ed Glaeser) have in common? That's right--none of us own homes. And in the immortal words of Upton Sinclair, it's difficult to make a man understand something when his
In fact, I think the mortgage interest tax deduction offers a powerful object lesson in the difficulty of unmaking policy that turns out not to work as well as you thought it would. When mortgages became common, and every time marginal
To a libertarian, this is a valuable cautionary tale: we should assume that any program we introduce will be with us in approximately that form forever, because ending it will harm the beneficiaries. Liberals are understandably unhappy with applying this lesson very broadly. Which is one of the reasons I suspect that the mortgage interest tax deduction will outlive us all.
With respect, the only way to eliminate mortgage interest deduction is by phasing it out gradually over a thirty year period--the amount of time that people who buy the day before the law is signed could legitimately expect it to exist.
I would also point out another obvious fact (though apparently not obvious enough): as Amity Shlaes points out, one of the exacerbating causes of the Great Depression's length was uncertainty. When people can't plan, they shut down: when they shut down, the economy shuts down.
Right now, if there were even a whiff of such an idea floated by people whom one might need to take seriously on the subject, (i.e. the President or some of the relevant Congressmen or Senators), it would bring what small signs of life exist in the housing market to a complete standstill.
Thank you for this. And for many other things recently.
I'm clinging to you for sanity in these awful times.
If I lived in D.C. (and was 5-7 inches taller) I'd ask you to marry me.
We live in a Constitutional Republic that has been bastardized into a democracy. That means 51% of the population can oppress 49% of the population.
Not only are you three not homeowners, but you're not homeowners in states with absurdly high property taxes (e.g., NJ). Taking away the mortgage interest deduction while we're still stuck with high property taxes won't get you a lot of votes here.
More generally, President Obama's need to raise federal taxes is probably going to run into some opposition from Democrats from high-tax areas, when they realize that a higher federal bracket might cause some of their biggest tax payers to move away when their total marginal tax rate surges up. Mike Bloomberg sounded alarms last week about Gov. Patterson's idea to raise the NY State income tax, noting that 40,000 tax payers pay half of NYC's taxes. How many of them might move if their federal and state taxes go up?
The mortgage interest deduction has been around for decades. I would have supported abolishing it at any other time, but it seems like a pretty bad idea to do so now. Collapsing home prices are destroying the economy. How is this a good time for a policy that would drive them down further? I don't support the homeowner bailouts or any other new policies intended to prop up housing prices, but I don't support changing policies to drive down housing prices either.
This would have been a very good idea in 2005. You could argue that homeowners could accept a loss in value on their homes since they had just enjoyed a huge windfall. It didn't happen then. Why would anyone think that this is a good idea in this environment?
There is an easy, politically viable, way:
Make all mortgage interest above $50,000 per year not deductible. It will hit a very small number of people now (tax the rich!), but with inflation will slowly reduce the deduction.
every time marginal interest rates rose, the tax deduction produced a windfall for existing homeowners.
What am I missing here? If I own my home, with an 6% mortgage, how do I receive a windfall if market interest rates rise to 7%? Do I get a check? If anything, doesn't the value of my home decrease, as there are marginally fewer potential buyers?
And can any increased tax deduction be rightly considered a windfall under any circumstances? The bad news is I have to pay $1000 in interest. The good news is my taxes go down by $250. I'm still -$750. Where's the "windfall?"
I'm not being argumentative - this seems easier than I'm making it.
The mortgage deduction will only last as long as the current system will last, which is only as long as the ChiComs (and others)keep buying our treasuries. That won't be longer than our lifetimes. We have possibly one more fake recovery max before the dollar loses it's world reserve currency status and the whole thing goes tits up.
There is NO political will to fix the system. There is no sufficient understanding of the real problems, much less the correct solutions.
The mortgage deduction is the rust that holds this corrupt system together. Eliminating the Mortgage interest deduction will cause house prices to plummet. We can't let prices fall without destroying the local tax structure that depends on property taxes. At a certain point of addiction, kicking the habit is fatal. We are beyond that point.
I take the interest deduction and property tax on two properties. It's pretty trivial in our overall financial picture. I can't get worked up either way.
"We live in a Constitutional Republic that has been bastardized into a democracy. That means 51% of the population can oppress 49% of the population."
I am no fan of democracy, but a constitution republic just compounds the problem by adding judicial activism to the tyranny of the majority.
A deduction for interest in an income tax is not a subsidy; it's a necessity in measuring income. Basically, it equates people whose earnings come from work with those whose earnings come from holding income-producing property. If you have, say, $1 million in bonds generating $100,000 a year in (taxable) interest income, your taxable income goes down by $100,000 a year if you sell the bonds and use the proceeds to buy a house. Nothing much wrong with that. But suppose that, instead of selling the bonds, you borrow $1 million to buy the house, paying $100,000 a year in interest. If you can deduct the interest, same tax result as before: taxable income goes down by $100,000 a year. If you can't deduct the interest, selling the bonds to buy the house is better than borrowing, even though the two transactions are functionally the same. Incurring an obligation to pay interest is, functionally, a way of giving up some of your future income. Since most cases of giving up future income reduce your income tax, so should paying interest.
If there were no interest deduction, people like my hypothetical buyer would sell the bonds (reducing their taxes) instead of borrowing, so they really wouldn't care much. But people with high earnings, but not from assets they can sell, can't do that, so they would take a hit, relative to the bond owner.
To be sure, this argument supports a deduction for all interest; limiting the deduction to interest on housing makes no sense and contributed to the belief that the deduction is a subsidy. And maybe we shouldn't be taxing incomes anyway; under a consumption tax, interest shouldn't be deductible.
"We have possibly one more fake recovery max before the dollar loses it's world reserve currency status and the whole thing goes tits up."
How would that happen with all the other currency candidates being in a far more precarious financial and demographic situation than we are?
I'm all for moving towards a system without the mortgage interest deduction. It isn't the government's business whether you buy a house with a big mortgage or a small mortgage or cash, or whether you rent, and the government therefore shouldn't favor one of these choices over another. The tax rate should be lowered or the standard deduction raised (or some combination of the two) so that it gets you to what someone in the middle of the pack would pay with all current deductions. Which is to say, people with the biggest mortgage interest deductions now would pay more tax, and people with no such deductions would pay a less.
The idea would be to keep people from overextending themselves on mortgages in order to reduce their taxes. And it should avoid penalizing people who, for whatever reason, really would be better advised to remain renters.
But, as other people have said, not all at once, and not this year.
Oddly, I remember when all interest could be deducted. Even car loan and credit card interest. The boom in financing consumption through home equity loans didn't really get going until this deduction was eliminated, so that mortgage interest was the only kind you could deduct. And look where THAT got us.
There are really only two choices -- fairly low rates and no deductions to speak of, or raise rates and let people deduct the interest on their car loans and credit cards (plus a zillion other things that require lots of extra paperwork). The system we've got now ties everything to houses, which is just silly.
jmo, the de facto world reserve currency will be a commodity. I am betting on oil, but there is also the possibilities that gold will make a comeback or some other commodity will take top spot. Paper currencies may all go down together or sequentially.
As oil reserves are being depleted, the new standard could likely experience deflation, which would be very bad.
The best thing to do would be to move to a currency backed by electricity, but I doubt that will happen as a kilowatt-dollar just seems too intangible for most people.
Keep in mind that the international bankers know that the post Bretton Woods system is finished and they are cooking up their own replacement now. What that turns out to be is anybody's guess.
I am no fan of democracy, but a constitution republic just compounds the problem by adding judicial activism to the tyranny of the majority.
I don't think the "judicial activism" critique is related to whether you're in a constitutional republic; rather, it requires an independent judiciary. The fact that the US government has a republican form based on a written constitution does not require the courts to form a separate branch or the judges to have life tenure, which (as I understand it) are what give judges the ability to engage in what their critics call judicial activism.
Great post and interesting comments...
Tax benefits on employer paid health insurance falls into the same category with (IMHO) worse consequences.
Has any one bothered to graph top marginal rates vs. housing prices over the last 30-40 years to see if there is any correlation? Given your premise, one would think that as marginal rates come down, that housing prices would either decline or stagnate. And if Obama raises marginal rates, that should be good for housing prices, right?
"The fact that the US government has a republican form based on a written constitution does not require the courts to form a separate branch or the judges to have life tenure, which (as I understand it) are what give judges the ability to engage in what their critics call judicial activism."
We could discuss that particular shortcomings of various forms of statism forever. What it boils down to is that Central governments are all dependent to one degree or another on control through physical force or threat of force.
The claim to a geographical monopoly of initiation of force is what distinguishes a state from other social institutions. Every government everywhere justifies this with some form of special pleading. They are all bullshit. initiating or threatening aggressive force is always wrong. Taxes are theft or extortion.
I have no problem with phasing it out, but the deduction means very little or nothing in the scheme of things. Eliminating it is not a panacea for preventing housing bubbles, as the tanking UK housing market makes fairly obvious. Easy credit overwhelms everything.
You need to get past your Renter's Syndrome and understand that the society has a vested interest in encouraging a fairly high level of homeownership. Ideally, ownership creates stability and a sense of investment among the population, and provides a rent-free place to live for those who have retired. A homeownership society should ultimately help to support the social security system and prevent rioting, both positives from the state's perspective.
If anything, the home deduction may have value for one reason alone -- it sends the message that Uncle Sam Wants You to Own a Home. Now, we just need to add two more slogans to the campaign posters: Uncle Sam Wants You To Work Hard To Save Up for a Down Payment, and Uncle Sam Doesn't Want You to Refi Every Two Years and Invest All of Your Equity In Jet Skis.
From RW:
Not anywhere I have ever lived.
I'll vote against any attempt to remove the mortgage interest deduction. It would cost me an enormous amount of money.
That's the end of the discussion, so far as I'm concerned. Now, if you want to implement a flat tax -- not a flat percentage rate, but a flat dollar amount -- then I'll listen to talk about how the mortgage deduction is unfair. But right now I pay more taxes than the vast majority of Americans, and that's AFTER the mortgage deduction. I've no interest in having any more of my money go to people who already aren't carrying their weight.
Uncle Sam wants us to own homes because homeowners are more controllable. Homeowners have something to lose, something to be threatened with if they don't tow the line.
Question: Who makes more revenue from a home, the seller or the entity that collects a property tax?
Homeowner's aren't real owners. If you have to keep paying for something after you bought it, you don't really own it.
When I retired and was deciding whether to pay off our mortgage, the conventional wisdom was that the government subsidy on mortgage interest made it a no brainer. Keep the mortgage and invest the difference. In the end, I decided it felt right to pay off the loan, even though the math suggested otherwise.
I wonder how many retirees chose not to pay off their mortgage, induced by the tax incentive? Now that markets (and their mortgage payoff money) are down 50%, how much of the "good" outcome from the deduction has been offset by this unintended "bad" outcome?
This is the problem with social engineering through the tax code. It's really hard to nail down all the possible costs, benefits, and outcomes. A phased in removal of the deduction makes perfect sense to me.
Bearded, "jmo, the de facto world reserve currency will be a commodity. I am betting on oil, but there is also the possibilities that gold will make a comeback or some other commodity will take top spot."
But above $60 a barrel it makes sense to convert coal to oil and the US is the Saudi Arabia of coal (in addition to being the Saudi Arabia of food).
Speaking of that, in a world of commoditiy backed currency being the Saudi Arabia of food has got to pay off for us - I would think. I mean, we can convert our food to oil (ethanol/biodiesel) but the Saudis can't convert their oil to food.
Not anywhere I have ever lived.
I didn't bother looking for more recent data, but as of the 2000 census, 30% of owner-occupied homes had no mortgage. Ideally, everyone would have a mortgage-free home by retirement age.
If you have to keep paying for something after you bought it, you don't really own it.
Next time that I need to get an oil change for the car, I'll remember that.
In any case, as a renter, you're indirectly paying property taxes, regardless. Unless you're residing in a pup tent somewhere in the woods, I'm not sure how you'd avoid that.
"But above $60 a barrel it makes sense to convert coal to oil and the US is the Saudi Arabia of coal (in addition to being the Saudi Arabia of food)."
So? It does no good to be resource rich if we still consume more than we produce. Look at Mexico today. The problem is that we have social institutions and policies that are inefficient at best and destructive at worst. Perverse incentives from welfare programs, etc. have to result in long term harm.
We have to boost production, reduce consumption or both, but it is not possible to do so in the current political environment, so we will continue to spend until the market for treasuries dries up. The dollar will tank and then we will be forced to change our monetary system. The dollar will take down the other paper currencies with it or be dragged down with them if they fall first.
Figuratively speaking, if the printing presses slow down, the whole think collapses. The national banks are trying to re-inflate a world economy with a giant gaping hole in it. That hole is government.
"Next time that I need to get an oil change for the car, I'll remember that. "
False analogy. Repainting you house is comparable to an oil change. Getting the registration renewed on your car is comparable to a property tax.
This means that you don't really own your car, either. Sucker.
"In any case, as a renter, you're indirectly paying property taxes, regardless. Unless you're residing in a pup tent somewhere in the woods, I'm not sure how you'd avoid that."
RW, you obviously know nothing about the theory of economic rents. Landlords can't charge more than the utility of the rental without increasing vacancy rates. People would simply rent smaller places, get roommates or move elsewhere.
Bearded,
"The dollar will tank and then we will be forced to change our monetary system."
Why? As long as the Yuan, Euro and Yen are doing worse than we are we are fine. Europe, Japan and especially China are already running into some pretty significant demographic challenges. It's going to get messy when China's one child policy comes home to roost, not to mention the issues Japan and Europe are already facing.
I think your thoery doesn't take into account the financial, demographic and political challenges that our major trading partners are facing.
False analogy.
Not for the point that I was making, namely that ownership is not necessarily free.
I must say, though, that I'm impressed by the quality of your internet access. Remote tax-free locales in the forest primeval generally don't have such fast connections.
Landlords can't charge more than the utility of the rental without increasing vacancy rates.
I don't think that even the wacky misguided Austrians would embrace the notion that producers can never pass their costs or cost increases onto their customers, or that producers would never base a decision to participate in the market based upon the cost of doing business. You may need to construct your own economic schoolhouse for that belief system. (I'd suggest forming a non-profit -- you might be eligible for a property tax abatement.)
Yes, but so? By renting a smaller place, getting a roommate, or moving elsewhere, you're still indirectly paying the property tax, regardless.
If your rent doesn't increase, but you have a worse living condition, you're paying for the tax. Maybe not in a beancounter way, but in a way that economists appreciate.
John Thacker and RW, just read the wikipedia article on economic rents. I'm not saying that Landlords can't pass on expenses, just that there is a limit to how much they can pass on.
http://en.wikipedia.org/wiki/Economic_rent
"Not for the point that I was making, namely that ownership is not necessarily free. "
I never said or implied that ownership is cost free. Property has maintenance costs, but true owners do not have to pay for possession after the purchase has been made. You don't see the U.S. giving property tax to France for the Louisianan Purchase, do you?
Make all mortgage interest above $50,000 per year not deductible. It will hit a very small number of people now (tax the rich!), but with inflation will slowly reduce the deduction.
Inflation is already (very, very, slowly) eroding away the value of the M.I.D. While I think capping the dollar amount of the deduction is a good idea, a $50,000 limit (which translates into something like a $600,000 mortgage) doesn't speed the process up all that much.
The mortgage deduction is the rust that holds this corrupt system together. Eliminating the Mortgage interest deduction will cause house prices to plummet.
Let's not exaggerate. Glaeser's proposal is not to eliminate the MID, but to decrease it (down to $300,000) via a gradual, phased in approach. Obviously eliminating the MID in one fell swoop would be risky. But that's not in the cards. But a substantial reduction in the size of the deduction, phased in over, say, ten years, wouldn't be disastrous.
If you can deduct the interest, same tax result as before: taxable income goes down by $100,000 a year. If you can't deduct the interest, selling the bonds to buy the house is better than borrowing, even though the two transactions are functionally the same.
Selling the bonds to buy the house (otherwise known as paying cash) is indeed better than going into debt to do the same, and the government shouldn't enter the market to undo this reality. If for some reason one really, truly values holding onto a given quantity of financial assets -- so much so that going into debt is a desirable way to avoid parting with said assets -- well, then fair play. One ought to be free to do that. But one shouldn't ask government to subsidize this rather questionable priority via the tax code. Also, the two transactions certainly are not "functionally the same." One of them leaves you in debt, the other doesn't. In the former, one is vulnerable to a fall in asset values. Creditors, as we all know, demand payment in full and on time, and care not what the rest of your portfolio is doing.
You need to get past your Renter's Syndrome and understand that the society has a vested interest in encouraging a fairly high level of homeownership...
It's far from clear that the MID increases the rate of home ownership. It pretty clearly does encourage the consumption of owner-occupied housing, but that's a very different animal. But even if the MID successfully boosts the rate of home ownership by a few points, it's likewise far from clear that this is a good thing. That's not to say there aren't some good effects flowing from home ownership (there are) but there are also some bad things, too (like a geographically calcified labor force).
I'm not saying that Landlords can't pass on expenses, just that there is a limit to how much they can pass on.
I just hope that you aren't fooling yourself to believe that your landlord is neatly carving out the property tax component from his cost basis, just to soothe your anarchist soul.
I'll repeat my statement: "as a renter, you're indirectly paying property taxes, regardless." If you believe that you're fighting the power by paying rent to someone who passes on a chunk of it to the county assessor, think again.
You may not be paying your full pro rata share of the landlord's taxes, and you may not be paying as much as you would as a homeowner, but you're still paying some taxes to the Evil Empire. Sucker.
I like Dan's comment best of all. In a just and fair tax system, with a flat rate, it makes a lot of sense to eliminate deductions for certain actions -- that FURTHERS equality. But in a system with inequities in rates, it is inevitable that all sorts of loopholes arise as a countermeasures to the inequity of the rate, and as long as society keeps hitting some of us harder than others, we who are the populist punching bags are going to fight to claw back as much as we can toward less discriminatory treatment.
"As long as the Yuan, Euro and Yen are doing worse than we are we are fine. "
Global hyperinflation is inevitable. It's a fiat currency race to the bottom. Everybody has an incentive to inflate. We see this playing out now.
The U.S. will continue to inflate because we do not have the discipline to reduce our deficits. Those deficits will eventually be monetized.
Government itself is a common resource that suffers from the tragedy of the commons. It's no coincidence that Wash. D.C. is still growing while every other city is not. Government is the last growth sector of the economy.
It's far from clear that the MID increases the rate of home ownership.
I'm not claiming that it does. I'm saying that it sends a message that the government wants citizens to own homes, and that the deduction may have a social value just for that reason alone.
On the whole, I'm indifferent. I suspect that it's really there both as an indirect bank subsidy and as a sort of subtle GDP booster (housing price increases are part of the calculation), which likely has the net effect of somewhat overstating US economic performance.
In any case, it's a non starter and the whole discussion is academic. The American home owning public would go absolutely ballistic at the suggestion, and no politician who proposed it could show his face in the legislature again. It's fun to talk about on the internet, but it's purely academic and just ain't gonna happen.
"You may not be paying your full pro rata share of the landlord's taxes, and you may not be paying as much as you would as a homeowner, but you're still paying some taxes to the Evil Empire. Sucker."
I'm not a sucker because I don't believe the lie that my taxes are a legitimate obligation. I would pay a mugger who pointed a gun at me too, but I wouldn't try to convince myself that it's voluntary or legitimate transaction. I just do all I can to avoid future muggings.
I'm not a sucker because I don't believe the lie that my taxes are a legitimate obligation.
They couldn't care less how pleased you are to pay, just so long as you're paying. Which you are. Sucker.
A sucker is a particular type of victim. A dupe. A sap.
I am a different type of victim. You have to know that, which means that you are intentionally conflating definitions. In short, you are dishonest.
RW, You now get to join SoV in the group of people I don't respond to anymore.
"Global hyperinflation is inevitable. It's a fiat currency race to the bottom. Everybody has an incentive to inflate. We see this playing out now."
But, your investment thesis is predicated on your assertion that the "dollar will tank." If US is (as you seem to agree) in a position of political, demographic, financial and resource strength relative to other coutries then the US dollar, US bonds and US equities should do quite well.
Without the tanking dollar all you seem to be advocating is investing in the hopes of an inflation driven commodity bubble. That bubble popped about 6 months ago.
It should be noted that home ownership makes people less mobile. This is a problem if it is necessary to move in order to get a job.
I am a different type of victim.
Only in your imagination. The government is still collecting your money, whether or not you like it. Just because the transfer isn't direct doesn't mean that you're not paying it, and you're fooling yourself if you believe that you're avoiding it.
Reality bites. Get a bandage, you're gonna need it.
Why does the government want to promote home ownership, anyway?
High home ownership just causes high unemployment because is chains laid-off workers to their economically-depressed locale (I'm looking at you, Michigan). The statistics bear this out.
My anecdotal life evidence also bears it out.
I rented an apartment for 4 years at a job when everyone else that started there was buying houses. When our company's business got shaky, I found a new job across the country and was gone in less than 2 months. A year later, my whole old department is laid off in an area with no job growth...but they can't move and get a job until they sell their houses...
I'm a home owner. I pay a mortgage. I'm in favor of abolishing the interest deduction.
jmo, the dollar will tank relative to commodities, but it will get stronger before it weakens as the smart money moves toward more and more liquid assets.
I suggest you research Exter's Pyramid:
http://commons.wikimedia.org/wiki/File:Inverse_pyramid_of_John_Exter.png
I own a mix of gold and oil futures. If the global economy recovers, the oil will pay off. If not, the gold will preserve my wealth.
I'm saying that it sends a message that the government wants citizens to own homes, and that the deduction may have a social value just for that reason alone.
Who cares what the government wants you to do? It seems to me people respond to financial incentives, or they respond to the possibility of going to prison. It seems to me they almost never parse the tax code in an effort to determine what actions "the government" (as if that's some unified entity capable of having an opinion) wants them to take. And again, it's not even clear that the benefits of boosting home ownership outweigh the negatives (I strongly suspect otherwise), but they must do so in order for us to talk about any "social value" flowing from this particular bit of tax code distortion. If the country is a bit worse off because more people own homes than rent owing to the existence of a subsidy, it hardly seems justifiable to talk about any kind of "value" -- social or otherwise.
Bearded Spock,
Reducing the value of the homes won't change the property tax one whit. What happens is that the assessor establishes a value for each house, and all the values are added up. The total value is divided by the amount of taxes needed to give an index of what the tax rate will be. The same amount of taxes is collected no matter what it is based on.
My $350K house is costing me $700/month in property taxes (school and county). I will be paying that $700 per month no matter what my house is valued at.
RW -
If you want to subsidize home ownership, but not to subsidize people who get into too much debt, then subsidize the process of saving up a down payment. Other countries do this. And we already subsidize retirement and education savings. There's no reason we can't do it.
(Yes, I know you can take money out of retirement accounts to do this now. But that's like taking money out of your house to buy a jet ski. I'm talking about having a whole different account for the purpose -- perhaps even one that parents and grandparents can set up for children and get the benefit of all those years' compound interest.)
But, on the other hand, most adults are in some special category for deductions in most years. If they aren't in the early years of a mortgage, when most of their payments go to interest, then they are paying for child care or tuition. Why not just merge all the deductions and lower rates across the board? Sure, it would benefit those adults who aren't in some special category this year, but you know they will be in one of those categories next year or the year after. (Some of us are trying very hard to get there!) If you lower rates across the board, the government doesn't have to pay nearly as much attention to who is doing what at any given time. And the incentives to game the system (by doing something that doesn't make economic sense otherwise) are reduced. This is a huge benefit.
Reducing the value of the homes won't change the property tax one whit.
Depends on the law. In some locations -- Massachusetts, for instance -- the law curbs the ability of municipalities to enhance property tax revenue via rate increases.
Bearded,
"Taxes are theft or extortion."
Two questions for you:
1) What services (if any) do you think government and government alone needs to provide (and if you're answer is "none" than who should provide police services, for example?)?
2) If not through taxes, how would you prefer to pay for those services?
"I own a mix of gold and oil futures. If the global economy recovers, the oil will pay off. If not, the gold will preserve my wealth."
When are you due to take delivery of that oil? It's not that hard to imagine a scenario in which you are right long term but the timing of the experation of your oil futures contracts means you loose nearly all of your investment. How are you insuring against that - are you hedged?
Who cares what the government wants you to do?
Much of the tax code is an exercise in social engineering. When the government wants to send a message, it uses tax rates and priorities to establish them. Using the mortgage interest deduction is just one of many ways that they do that.
It seems to me they almost never parse the tax code in an effort to determine what actions "the government" (as if that's some unified entity capable of having an opinion) wants them to take.
This is one of those things that many Americans intuitively understand. Practically every homeowner is enticed by the writeoff. They see it (incorrectly, although as the state intended) as a sort of gift and encouragement to buy a house.
If the country is a bit worse off because more people own homes than rent owing to the existence of a subsidy, it hardly seems justifiable to talk about any kind of "value" -- social or otherwise.
It's a mixed bag. People who are invested in the places where they live should create stability. But it backfires badly when their investment involves zero or negative equity, payments that they cannot afford and/or a location in a dying part of the country.
Gooch brings up a tangential but still socially significant issue -- regional dead zones. I'm not quite sure what to do with wastelands like Detroit or SE Michigan, but you can bet that they will die completely if there are no newcomers to make a commitment there.
"Reducing the value of the homes won't change the property tax one whit. What happens is that the assessor establishes a value for each house, and all the values are added up."
Actually, it's worse than that. Supply side economics work in reverse too. High tax areas drive out people not employed by local government, which puts an additional burden on those who are left. If the local governments/school districts don't cut back, eventually this gets more and more lopsided until no net taxpayers are left.
Your $700 tax bill will eventually go up. It will never substantially go down. It's a ratchet.
I think Bearded Spock and RW should get a room. (But make sure you post the photos to flikr!)
Reducing the value of the homes won't change the property tax one whit.
This is incorrect. Property taxes (or at least many of the components that comprise the tax bill) are typically ad valorem taxes, meaning that they are based upon property value. Assessments can be appealed and reduced; each county should have an appeals process.
If you want to subsidize home ownership, but not to subsidize people who get into too much debt, then subsidize the process of saving up a down payment.
Not a bad idea. I would support something like that. (As noted, I'm not particularly supportive of the interest deduction.)
"When are you due to take delivery of that oil?"
I just roll over the contracts. There's some overhead, but it's pretty small. It's like dividend reinvestment.
I am valuing WTI crude at$40/bbl and gold at $1000/oz. I buy whichever is cheapest relative to those evaluations.
From Fred:
1) What services (if any) do you think government and government alone needs to provide (and if you're answer is "none" than who should provide police services, for example?)?
2) If not through taxes, how would you prefer to pay for those services?
answer:
1. none. I'm an anarchocapitalist. Private courts, private security, toll roads, insurance companies can replace the state entirely.
2.the same way I pay for all other services. Voluntarily as I need or want them.
Sure, if all you're saying is that the tax incidence of the tax almost never falls 100% on the renter, absolutely. But it also almost surely does not fall 100% on the landowner either.
In the terms of which fallacy is more prevalent in people's mind, I can't say I know for sure.
Bearded,
"I just roll over the contracts. There's some overhead, but it's pretty small."
Can you please explain how the futures contracts you invest in work.
If you agree to take delivery of 1000 barrels in March '10 it will cost you $52,000 (usally futures contracts only call for 5 or 10% down, but lets assume for the sake of arguement that you are not taking advantage of this feature) If oil closes at $40 in March of '10 you will be down 20%. It is entirely possible that traders will be betting that oil will be 60 in March '11. But, due to the losses on your contract you won't be able to buy 1000 barrels you'll only be able to buy 666 barrels. If again they are wrong and oil is still 40 in March '11 then you are out
13,400 and your 52,000 investment is down to 26,600.
That's hardley "some overhead". It seems quite risky. Again, you may be right in the long term but if you are a few years off or if the market moves the wrong way at the wrong time you are done.
"How are you insuring against that - are you hedged?"
You mean other than with gold?
It is not necessary to hedge against oil futures because oil futures themselves are a hedge against rising costs.
It's possible that both gold and oil will drop in value, but if that happens, then it means I'm wrong about the coming crash and none of us has anything to worry about. My portfolio is kind of like paying a life insurance premium. It's a bet you never want to win, but it gives me peace of mind to know I've made it.
You have it exactly right, jmo. I actually lost quite a bit last fall in that very scenario. Hindsight is 20/20.
Bearded,
From your post yesterday...
"I'll go you one better: with 2 mil, I would advise 10% cash, 10% precious metals, 20% shorts on index funds (diamonds, spiders, etc), 10% WTI oil futures, 5% credit default swaps on Russian gov't debt, 5% Japanese Yen, and 40% would vary according to the clients goals and risk tolerance"
But, a temporary rally could decimate your short positions. At what point in the (false) rally would adivse closing out the short positions? Again, if your timing is off you could be wiped out. Again, to protect yourself that 40% of "other" would have to fully hedge the 20% short position.
Are you sure you've really thought this though?
Bearded,
Again, I think the biggest risk to your portfolio isn't being right or wrong, it's being right but your timing being off.
"But, a temporary rally could decimate your short positions. At what point in the (false) rally would advise closing out the short positions? Again, if your timing is off you could be wiped out. Again, to protect yourself that 40% of "other" would have to fully hedge the 20% short position."
I have 44% to play with. I liquidated my Yen position, remember? Wal-Mart and Google are also hedges against my short index positions. I also have the 10% cash to protect against a margin call which means I can ride out a pretty good, long rally.
"I have 44% to play with. I liquidated my Yen position, remember? Wal-Mart and Google are also hedges against my short index positions. I also have the 10% cash to protect against a margin call which means I can ride out a pretty good, long rally."
But, if the market remains irrational one day longer than you can remain solvent, you're done.
I don't know why you introduce the added risk of the short positions. Wouldn't a bet on Exxon Mobil, Total or BP be a better bet?
"Wouldn't a bet on Exxon Mobil, Total or BP be a better bet?"
In the absence of windfall profits tax, yes. Unfortunately, congress is controlled by idiots who don't know the difference between profit and profit margin.
The ideal solution would be a giant oil tank in my back yard, but because I'm a renter, I don't think my landlord would go for it.
delurking,
To pay $50k/year in interest, one would have to take out $850k at 6% or $500k at 10%. And that's just in the first year. By year 10, you're down to $42k in interest payments.
I like the mortgage interest deduction.
I like the idea that a Texan making fifty grand a year gets his four-bedroom house subsidized by some liberal urbanite making six figures and living with roommates, first by progressive taxation, and then by the MID.
The average Texan with two kids and a mortgage has a yearly income tax bill no higher than the cost of a nice TV.
If we're going to have a class war, I'm going to see to it that my people are winning.
Bearded,
But, you need to weigh the risk of a windfall profits tax against the risk that your short positions and futures contracts will blow up in your face.
A windfall profits tax isn't going to drive Exxon Mobil to zero. But, a false rally could force the liquidation of your portfolio.
jmo, nothing is totally risk free. Obama's carbon tax scheme could wipe out big oil. Maybe tomorrow someone will perfect nuclear fusion and wipe out the oil companies. Someone could invent a car that runs on seawater.
From where I stand, a crash is much more likely that a portfolio destroying rally. The only sane adviser Obama has (Volker) is 85 years old and badly outnumbered. The Fed has rates at zero, meaning Bernanke is out of bullets. Eastern Europe and Mexico are teetering and war could break out in Iran, Georgia, Pakistan, Korea, Venezuela or Israel. If a rogue nuke goes off anywhere, boom.
War will cause oil to skyrocket and set off a new round of foreclosures. The FDIC is badly undercapitalized. If there is a bank run at Citi if Russia or China dump their treasuries, or even fail to roll them over, we are done. If they fail in increase their holdings, we are done.
The fiscal time bombs of Medicare and Social Security means any improvement at all comes in spite of a substantial budget headwind. Home prices are down 19% with no bottom in sight. We are losing 600,000 jobs a week with no end in sight. In spite of this, inflation is INCREASING.
California is bankrupt. Detroit is becoming a ghost town. What sane investor would even by T-bills now, much less start a business?
Much of the tax code is an exercise in social engineering.
Sadly true.
When the government wants to send a message, it uses tax rates and priorities to establish them.
Er no. The government doesn't use tax rates to "send a message." The government uses tax rates to make people take certain actions, because tax code subsidies are virtually identical, in economic terms, to paying people to do something.
They see it (incorrectly, although as the state intended) as a sort of gift and encouragement to buy a house.
It's not "incorrect" to see it as a "gift." Is is a gift -- it's a subsidy of real, economic value. It's a bribe, in other words.
It's a mixed bag. People who are invested in the places where they live should create stability.
Maybe. But "stability" isn't always a good thing -- not if it's excessive, and inhibits people from moving to places where they can find productive work. But my point is, to the extent that stability (or any other purported benefit flowing from home ownership) is desirable, we'll get it without subsidizing home ownership. In other words, there are plenty of reasons people like owning homes - so many and so strong, in fact, that countries (Britain, Canada) that eschew tax code subsidization of home ownership enjoy ownership rates similar to or even higher than America. Again, the question isn't: is home ownership a good thing. The question is: does tax code subsidization of home ownership pass cost benefit analysis? Almost certainly it does not.
Bearded,
And how were things looking in 2001, 1981, 1974, 1957, 1947, 1939, 1929, 1916, (sorry I need to do more reading on US history from the civil war to WWI) 1860, 1812, 1776, 1620?
"What sane investor would even by T-bills now, much less start a business?"
You buy when everyone else is selling and sell when everyone else is buying.
FYI - I'm 20% cash 80% spiders just so we have all our cards on the table.
I like the idea that a Texan making fifty grand a year gets his four-bedroom house subsidized by some liberal urbanite making six figures and living with roommates, first by progressive taxation, and then by the MID.
That idea will become less appealing once you do the math. Put together an amortization table and take a look -- some average Texas family with a mortgage at prevailing interest rates and at an amount matched to current local median home prices (something under $200k in Dallas, for example) is unlikely to have deductible interest payments that greatly exceed the standard deduction that they'd be getting anyway.
For most people, the value of the deduction has to be compared on a marginal basis to the standard deduction that they'd otherwise get. The deduction really benefits those who are buying expensive homes, and those who have enough deductions to itemize without the house.
If taking on the mortgage doesn't provide a lot of additional deductions aside from the interest, property taxes, and a few minor things such DMV fees, then it has even less value. In a low interest rate environment such as this one, it has even less value than normal.
The little secret of the mortgage interest deduction is that a lot of people are not getting nearly as much out of it as they think. Some people get barely anything out of it at all, and don't even seem to know it. A married couple would be getting a $10k+ standard deduction without the loan.
One reason to keep it is that it provides political happy talk for folks like yourself, who think that it is a great gift for them, when it is a greater gift for the banking industry. Kind of ironic, when you think about it.
The government doesn't use tax rates to "send a message."
It often does. Sin taxes communicate our dislike of sin. Low gas taxes encourage us to love our cars. And a mortgage tax deduction tells us that Uncle likes homeownership.
Is is a gift
I would say that in much of the country that it is incorrectly valued by many, and grossly overvalued by some. (See above.) The gift is mostly to the mortgage and building industries, since it probably increases demand and raises prices, which generate activity for them.
But "stability" isn't always a good thing -- not if it's excessive, and inhibits people from moving to places where they can find productive work.
Of course, those things that are excessive are bad, by definition, but still, governments tend to value stability and actively encourage it. Cable TV and mortgage payments beat coups, revolutions and all that other nasty stuff.
Ideally, we would rebuild the dying parts of the country, rather than let them fester and rot (although that's debatable, I know.) Our Dust Bowl diaspora wasn't pretty, and I'm not sure that we'd benefit from a repeat of that, either. A mass exodus from the Detroit Metro might be taking labor mobility to an extreme...
Bearded,
I think when you look back at 1981 or 1974 or 1947 you fail to realize how dire things looked to those who only knew what was known at the time. You look back at the post WWII boom or the collapse in commodity prices in the 1980s, you think, "Obviously that was what was going to happen." But for those alive at the time, almost no one thought that was how things were going to turn out.
I leave you with this:
http://www.youtube.com/watch?v=pKu2QaytmrM
I hope you're right, jmo.
Every economy survives until it doesn't. Every crisis is endured until the last one.
My theory is that in much the same way that small businesses emotionally count accounts receive three or four times, tax payers count any money they pay in taxes three or four time.
I mean seriously, if you're mortgage is big enough and your income is high enough that you're seeing a $10,000 reduction in your income tax as a result of the mortgage interest deduction, is that $10K really a make or break on the financial decisions you're making? If it is, likely you're on of the over-leveraged assholes who got us in this mess.
I'm not saying I'm gonna walk away from the (nominal) tax benefit I get deducting my mortgage interest. And I'm not saying anyone should vote against self-interest. But Kee Friggen Kreyest -- you're making enough money that it adds up to more than a bag of shell, and you're playing it that close to the margin that you care enough about the money to raise your blood pressure... well all I can say is enjoy your heart attack, pal.
if you're mortgage is big enough and your income is high enough that you're seeing a $10,000 reduction in your income tax as a result of the mortgage interest deduction, is that $10K really a make or break on the financial decisions you're making?
It should be noted that the savings from a $10,000 deduction is not $10,000, but $10,000 multiplied by the tax bracket.
I'm willing to bet that for some a moderate income home buyer in a Dallas suburb that the net value of the additional deductions available from buying vs. renting amounts to maybe a couple of hundred bucks per month.
For someone with a moderate income, that savings might actually be pretty good, but I'd bet that the average person receiving it thinks that he's getting far more than that.
I'm not criticizing the motivation to take the deduction per se, just observing that the person receiving it probably believes it to be worth far more than what it is really is. The government gets to purchase a lot of contentment from the citizens at a fairly low cost.
I'd reckon that not one person in five actually understands this.
Like I said before, I think folks do "emotional accounting". I know I sure. I can spend the same AR check 5 times, and that's without accouting for overhead or Uncle Sam's cut. On the other side, a K in taxes feels like $10K spent on a boat. But until I read your "contentment" comment it had never occurred to me that this could work in reverse -- that *not* paying $1000 in taxes could feel like an extraordinary windfall!
I'd reckon that not one person in five actually understands this.
You think that it's that many?
If my anecdotal experience means anything, many people don't appear to understand the difference between a deduction and a credit, and are shocked when they finally understand it and calculate what they really means in dollars and cents. The charities are probably thankful for the misunderstanding, though.
I think folks do "emotional accounting".
Couldn't agree more.
Does this proposal also include doing away with the interest deduction a company that owns commercial real estate (i.e., landlords) can take?
While we're at it, let's toss loan interest for factories, ships, and mines off the P&L. How about rent and payroll? Let's have a tax on gross receipts
Actually this is what they're doing in the American Virgin Islands. As might imagine it's had a wonderfully stimulative effect on the black market, because the entire economy is now the black market!
Weeeee!
Because the effect would occur on my marginal income, my top bracket portion, it would hike my federal income taxes by around $6k per year. I live in a $300k house in an area where the average house runs around $450. We're not rich but the mortgage nut is around $2300 per month, and the deduction knocks $20k off of the most taxable portion of our income. The tax hike would eliminate our discretionary income entirely and probably cause us to have to give up some other things - like maybe we'd have to sell my car and I'd take an hour bus ride into work rather than car pooling. Yeah, that sounds real libertarian. You a renter by any chance, Megan?
The S&L crisis of the 80's was caused largely by the elimination of the deductibility of commercial mortgage interest. When that deduction was eliminated, it greatly reduced the desirability of commercial property investments, and a lot of corporations simply walked away from mortgaged commercial property, leaving poorly capitalized S&Ls, with their low cash reserve requirements, holding the bag. Not only will this increase foreclosures and drive real estate prices down by reducing the desirability of home owning, but the suddenly hiked tax bills could force a lot of people into bankruptcy, or at least into a choice of stopping payment on the mortgage in order to pay taxes.
The banks would be left holding the bag on a ton of foreclosed, radically depreciating properties. Impose this measure during a liquidity crisis and you would have a good tool to drive the many solvent banks, particularly small ones lacking the ability to absorb enormous losses, out of business.
Oh well, whatever. If we're determined to destroy the existing social order and the tired old morals and capitalism of the right, whatever means you guys choose is fine with me. Just do me a favor and don't bitch at me when I go all John Galt on your ass and quit paying my bills entirely, and move back off the grid in the inexpensive, rural bumfuck area that I grew up in, okay? Cash economy and subsistence farming, and black market economy here I come. Because I'll be damned if you bastards are going to make me underwrite the policies aimed at subjugating me and turning me into a public revenue generating machine. I just finished doing my taxes; even in this supposedly 'deregulated anything goes Bush" environment I'm paying close to 35% of my gross income in taxes to the three levels of government now fastened onto my neck. If I was self-employed this amount would be close to 10% higher. This is absurd and I'm not impressed to see people claiming to be libertarian and advocating this path.
Non servitur.
You might be amused by this:
Social Collapse Best Practices
http://cluborlov.blogspot.com/2009/02/social-collapse-best-practices.html
With regard to our home, we calculated our risk VERY WELL under the current laws (especially compared to those facing foreclosure). Now, ALL the rules are changing. But, we can't sell our house to re-calculate the risk in this market!
We're looking at paying more federal income taxes, more real estate taxes (our assessment went down but they raised the real estate "rates" 30% so, it's net up!), premiums on our electric and water, possibly no charitable deductions, and now possibly no mortgage interest deduction (our largest deduction considering the inflated D.C. prices!) If we don't have the mortgage interest deduction on top of all these new taxes we're going to be paying, we are not sure that we will be able to pay our mortgage after we pay all the new taxes that are coming our way!
Interestingly, I live in D.C. and work for the federal government, I am not rich! But, with the cost of living adjustments to mine and my husband's salaries in D.C., we're considered "rich" by our government (over 250). Tax-wise, it would be better for us, if I did not work BUT, we will lose our home if I do not since we cannot sell it. From our calculations, it looks like all my effort of working will only be about a 20K benefit for us, which will be killed by child care. It's a very upsetting because we're stuck with our home in this market.
I know that we will figure out a way to survive and keep our home despite all these increases - God willing - even if that means a 3rd weekend job in our family. But, I do know that these policies are pushing us to "get out of the game" the first moment we can - which means we will NOT be part of the "big tax" contributing base that would sustain these new policies long-term. We are NOT going to work this hard for everyone else. Instead, I'll quit working, we'll sell our home, and we'll become "everyone else" - maybe even get a handout or two (if you can't be 'em).
Moreover, and this should be of utmost concern to all, we WILL NOT have enough money to buy ANYTHING in our economy once we pay our new bills and new taxes. I am not an economist but when a normal family like mine is going to be completely shutdown and unable to participate in buying new goods and services (not to mention we'll be working this hard with no extra cash for a vacation!) - it's going to be very very very bad for our economy and ultimately, our country.
It's odd how two people can have such different perspectives.
My wife and I own my own business, pay property taxes in two zipcodes that are among the most expensive in the US, and our household income is a fraction of yours. Our property taxes have risen dramatically in the last few years, along with food, energy (the recent price collapse not withstanding,) and other necessities.
Yet on a weekly basis at least, I am very nearly brought to tears by the affluence I enjoy. I simply cannot believe my good fortune and the abundance of my life. We've even managed to make some tax exempt gifts over the years. For example, we gave $4K to the Red Cross after Katrina, and we gave $1800 to No On Prop 8.
I know, that must sound terribly smug and insufferably pious. But it's the way I feel, and as a result I have a difficult time empathizing with someone who makes over $250K putting an exclamation point at the end of the words "I am not rich".
If you're worried about the disappearance of the mortgage interest deduction disappearing anytime soon, you should just stop. It's not going anywhere. Take a deep breath and then blow it out slowly.
I would, in the interest of friendly internet debate, invite you to reconsider your definition of "normal family". Simply on the basis of your household income, it's hard for me to accept that yours is a normal family. There are other indicators as well, but they are less quantifiable.
I've got to agree with Tony; its very hard to view of family earning $250k as ordinary. I can understand that "not rich" feeling since high cash flow does not equal high net worth but it does sort of boggle the mind as to how you can have such a high cash flow and not manage to accumulate a high net worth.
On the other hand I agree completely with Worried's underlying point. I feel very similarly. We did everything right, we calculated the risks, we did our due diligence and yet we're the ones that are being penalized by a change of rules.
So whacha gonna do? Go off the grid in rural bumfuck with Someguy? Or go Waterworld with my family?
Fact is, you, Someguy, me didn't do "everything" right; we didn't "calculate the risks" or at least we didn't calculate them properly. If we had, all three of us would have seen this coming, planned accordingly and we'd be awash in TARP money.
Instead I'm thinking that maybe we'll bank this year's Summer rental monies and redo our kitchen cabinets next year.
I know, I've done more than my share of "you lazy stupid greedy bastards" bitching here and elsewhere. But I'm over it. If I'm so goddamned smart, then how come Bernake or Gertzwhatever hasn't backed a dumptruck full of government money into my driveway?
Yeah, $250k K a year sounds like a lot until you're living in a town where a decent secretary makes $65. It sounds like a lot until you take out 10 years of student loan payments on your education, which would cover a $225k 30 year fixed mortgage in most of the saner parts of the country. Changing the rules doesn't just upset expectations, it will wipe people out. True, nobody said I had to become a productive member of society who pays over $40k a year in tax money. But I did it and y'all are benefitting from my decision to become your golden goose. I'm glad you're over what the thieves are trying to do, Tony, but I'm not.
I'm not over it because my wife and I just recently got out of the Grinding Poverty After Professional Degree School bracket, and something like this notion, or big tax hikes coming elsewhere, will knock us right back into it. If Obama gets his wish list - plus Tarp II plus Porkulus II, to match his insane health care nationalization and carbon regulation scheme - going off the grid looks better. After close to 15 years of really struggling to pay for school then entry-level employment, to get the success we're just starting to enjoy taken away by the government will be too bitter a pill to swallow. We make in the mid 100's, and just hit that level in the last two years. So much for that; I guess we're now teh evil rich. I worked construction, drove truck and served in the Army prior to grad school and I know how to farm and make a living by means other than pushing paper and I may consider it if things go much further down the track they are on. I can about stomach paying 35% of my income in taxes; 45 or 50%, especially 51%, will be just too much. Damned if I'm going to work more for other people than for my own family.
It never ceases to amaze how blithely people - including so-called libertarians - decide that what we need to do is fundamentally re-order society from the top down.
The zipcodes I pay property taxes in are in Manhattan and the Town of East Hampton. I've got a pretty good idea how just how much $250K is.
Man up or get off the grid.
THIS OBAMA ADMINISTRATION IS DESTROYING AMERICA,
THIS IS THE WORST FOR OUR ECONOMY BY NOT ALLOWING THE AMERICAN PEOPLE TO DEDUCT MORTAGE INTEREST.
THE OBAMA ADMINISTRATION IS ALSO NOT GOING TO ALLOW DONATIONS TO CHARTIABLE ORGINAZATIONS.
THIS IS DISGUSTING THE WAY THIS ADMINISTRATION HAS CARRIED OUR COUNTRY TO A SOCIALIZE COUNTRY.
I WILL BE GLAD TO SEE THE DEMOCRAPTS OUT OF GOV.
The deduction for mortgage interest is by far the most unfair part of the tax code and should be eliminated. It should haver been eliminated decades ago !! Renters get no deduction but the rent they pay is the money that the homeowner uses to pay their mortgage. Either allow renters to deduct a portion of their rent or completely eliminate the deduction altogether.