Posted on 08/31/2005 5:42:50 PM PDT by Man50D
In the arena of tax policy and tax reform the income tax deductions for Mortgage interest seems to be cast in stone and never to be touched. This is the one tax deduction every homeowner knows to include in his tax return and a benefit that the President has asked his tax reform panel to keep. Unfortunately, one Huge and growing tax issue hanging over the mortgage deduction is the Alternative Minimum Tax ( AMT). A tax hitting more and more Middle Class Americans where their Tax Accountant has to figure out their taxes 2 ways. Because AMT has not been adjusted for inflation, Teachers, Policemen and other working families are finding they have enough legitimate deductions to get a nice refund but the AMT kicks in and they get no refund but owe money.
AMT repeal or adjustment requires a major offset to maintain revenue neutrality. One consideration is the elimination of the Mortgage Interest deduction or the elimination of the local property tax deduction. Democrats see this as an attack against Blue States because the Property tax issue affects Blue States more than Red States.
Both issues and many others can be solved if our politicians and American Families can get out of an "Income Tax" mentality and be open to a new way of improving the lives of American Families and still providing consistant revenue for to the national treasury.
Supporters say there is only one tax reform package that meets the goal for home ownership; maximizes the mortgage deduction in a new way and does away with the AMT; It is the The Fair Tax Legislative package as House Bill HR 25 and Senate Bill S25.
Aug 30th, 2005: 09:15:02
Historically, the actually Mortgage interest dedcuction benefit has diminished under the archaic income tax code. As income tax brackets have lowered and interest rates have lowered so has the amount of dollars you get back from your mortgage interest deduction. The Tax payer in a 25% federal tax bracket faithfully files a return on or before April 15th to get a deduction which only gives him back $250 of his own money back per $1,000 spent in Mortgage interest. When upper tax brackets used to be 50% to 70 % Americans would get back even more. Keep in mind the deduction is a means to get back some(25%) of YOUR money back from the Government. However, the 7.65% Americans pay out in payroll tax provides no deductibility or return at all.
In addition, American families still have to pay the mortgage principal out of after tax dollars. For many middle class Americans that includes a 25% federal income tax and a 7.65% payroll tax for a total federal tax bite of 32.65%. On a $100,000 mortgage at 6% a family might get back $1500 with a mortgage interest deduction but you get no deduction for the principal paid. You pay that with after tax dollars.
There is a Tax Reform package in Congress that would maximize the Mortgage deduction in a totally new way with added benefits for families and home ownership.
Under the Fair Tax, American workers get 100% of their paychecks with no payroll tax or income tax taken out. The 32.65% they had subtracted each week is now in their pockets to help pay the principal on their mortgage or any other important family needs. You end up with the income tax equivalent of a 100% deduction of principal and interest by replacing the income tax and the IRS with the Fair Tax.
Keeping the 32.65% is the same as an increase of your take home pay of over 48%.
The Fair Tax reform package is well documented and researched on the Fair Tax website www.fairtax.org.( FAQ, Research, Rebuttal sections) It has been reintroduced in the 109th Congress as HR25 and S25.
The Fair Tax legislative package first eliminates the current income and payroll tax system on American families and American business.
Elimination of hidden business taxes will first cause prices to drop 22 to 25%. The Fair Tax than adds in a federal retail sales tax of 30% (equivalent to income tax of 23%)on new reatail products and services. American consumers will pay about the same as they did before but take home a much larger paycheck ( by 30 to 50 %).
The Fair Tax applies to new house construction but not pre-owned homes. For Builders their costs to build will drop an average 25% so when they sell a new House with the Fair Tax added in (23% inclusive) it will be about the same as it is now.
American Families will be able to afford that new house much more easily with a 30 to 50 % increase in take home pay. American Families will be able to save for a down payment more quickly.
The Fair Tax is revenue neutral, bringing in the same revenue as current income taxes, Social Security taxes and Medicare taxes.
In addition, the package has a Prebate system so that every family receives a monthly check at the beginning of the month to cover Sales tax on all purchases up to the poverty line. For a married family of 4 the poverty line is $25,660 and they wil receive a monthly check of $492/m. No receipts, no filing monthly forms.
Talk show host Neil Boortz has put out an informative and witty book recently called "The Fair Tax Book" which gives you the background on this well researched package which has been promoted by Americans for Fair Taxation, the NTU- National Tax payers Union and others for several years; and more recently by 75 national economists from around the country.
Neil's Book is currently #1 on the New York Times Best Seller's List for Non-fiction.
Petition signers at www.fairtax.org are continuing to grow with a goal to rich One million.
For a great Fair Tax calculator visit; http://www.pafairtax.org/calc.php and see how the Fair Tax helps your family.
If you want tax reform that is revenue neutral, eliminates the AMT, gives you more take home pay and a maximized Mortgage deduction for interest and principal than call your Congressmen and Senators and tell them you support the Fair Tax Legislative package HR 25/ S25. For more information visit www.fairtax.org and read the FAQ section.
Ping
bttt
Taking on the enemy in his own back yard. I love it.
If you would like to be added to this ping list let me know.
John Linder in the House(HR25) & Saxby Chambliss Senate(S25) offer a comprehensive bill to kill all income and SS/Medicare payroll taxes outright and replace them with with a national retail sales tax administered by the states.
H.R.25,S.25
A bill to promote freedom, fairness, and economic opportunity by repealing the income tax and other taxes, abolishing the Internal Revenue Service, and enacting a national retail sales tax to be administered primarily by the States.Refer for additional information:
It ain't just the taxes doing us in. It's the horrid costs the system imposes on all our lives through complexity and high marginal tax rates as well as in lost freedoms.
http://www.heritage.org/Research/Taxes/hl565.cfm
An American Economic Review study found that every dollar of taxes could impose as much as $4 of lost output on the economy, with the probable harm ranging between $1.32 and $1.47
Edgar K. Browning, "On the Marginal Welfare Cost of Taxation," American Economic Review, Vol. 77, No. 1 (March 1987), pp. 11-23.
STATEMENT OF REPRESENTATIVE DICK ARMEY
HEARING ON THE IMPACT ON
INDIVIDUALS AND FAMILIES OF REPLACING THE FEDERAL INCOME TAX
Committee on Ways and Means, Full Committee, 4-15-97 Testimony
Hinders Economic Opportunity
According to a study by Jane Gravelle, an economist with the Congressional Research Service, and Larry Kotlikoff, an economist at Boston University, the corporate income tax costs the economy more in lost production than it raises in revenue for the Treasury. Dale Jorgenson, the chairman of the Economics Department at Harvard University, found that each extra dollar the government raises in revenue through the current system costs the economy $1.39.
Economic Burden of Taxation
William A. Niskanen
Presented October 2003
Friedman Conference
Federal Reserve Bank Dallas page 6.
www.dallasfed.org/news/research/2003/03ftc_niskanen.pdf"Given that the elasticity c implicit in recent U.S. fiscal conditions is about 0.8 and the average tax rate is about 0.3, the marginal cost of government spending and taxes in the United States may be about $2.75 per additional dollar of tax revenue. One wonders whether there are any government programs for which the marginal value is that high. Given the estimate of the long-term elasticity c from the U.S. time-series data, the marginal cost of government spending and taxes may be as high as $4.50 at the current average tax rate. "
bump for the fair tax
Great work. Wonderful to see the discussion. I developed a discussion of tax treatment of both mortgage interest and capital gains (each of which is extremely favorable for residential housing) to include in my public speech for the Fair Tax. The Fair Tax is MUCH more favorable to the homeowner. When they sell, there is NO cap gain tax, and that is very significant to those whose house price has soared in recent years. Also, better for those who have low income and do not itemize mortgage interest.
This may be the best and fairest tax system - I don't know. But you can be pretty sure that your employer will try to cut your wages using a variety of reasons I suspect. For example "Your previous salary was based on a standard of living with tax folded in. There is no justification for you to get a 48% raise etc - this is an opportunity to reduce costs etc blah blah blah."
A worker is worth more to the company than what they get in pay. Your argument is also a reverse one to use against the boss.
Since he no longer has to pay his part of the taxes he can now pay them directly to you.
Pay is an agreement worked out between the employeer and employee. Pay vs effort. If one party will not agree then the terms must be changed or find another place to work.
Who pays 48% of the wages in federal taxes? And you are correct, if prices are going to come down as this article suggests, employees have to take a paycut. That is according to the man that did the research for fairtax.org. But fair taxers tell you that you get to keep you full paycheck and prices come down. That is a bold face lie that their very own research denies. Until fair taxers are honest, there is no point at reading their information.
ANother way to look at it is that employers MUST pay the same contracted wage to employees - otherwise the employees will be poorer... they still have to pay taxes, just not from withholding...
Allowing workers to keep their gross pay doesn't mean they'll pay no taxes - just that they'll pay them later...so they still need that same pay as before.
If take home pay actually went up, the supply of labor would actually decrease as workers would choose to work less and enjoy more leisure time. All that supposed economic growth would not happen as the labor supply would dry up and our country would be less productive and it would be harder to find workers to get anything done.
A good example is in foregoing overtime under the income tax system when it bumps tax witholding through the roof. It's worthmore to go fishing.
The incentive works in the opposite direction under a consumption tax system where earning more dollars can mean more for future in savings and investing taxfree, instead of consuming and paying out taxes on conusmption today.
In short, the substitution and income effects are due to the behavioural responses to the current tax income system as anything else.
Changing to a consumption tax system changes the incentives pushing spending and leisure under income taxes towards the direction the aquisition & growth of wealth and work moditying the labor supply curve significantly.
In fact Dr. Jorgenson mentions this effect as one of the driving factors significantly raising investment and increasing labor supply in his studies as one of the effects of tax reform in replacing income taxes with a retail sales tax.
http://www.economics.harvard.edu/faculty/jorgenson/papers/baker.pdf
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Revised April 12, 1999. This paper was prepared for presentation at the
We have simulated the impact of implementing two different versions of a consumption tax at the beginning of 1996. The first is the Armey-Shelby Flat Tax. The Armey-Shelby proposal levies taxes on the difference between business receipts and the sum of business purchases and business payrolls. Labor income is taxed at the individual level. An important feature of the proposal is the system of personal exemptions at the individual level that we have described. The second proposal we have considered is the National Retail Sales Tax. The tax base is the same as in our simulations of the Flat Tax. However, the method of tax collection is different. The Arrney-Shelby Flat Tax preserves the existing structures of the corporate and individual income taxes, but alters the tax base. The National Retail Sales Tax eliminates corporate and individual income taxes; retail establishments would collect the taxes. This would require a broad definition of these establishments to include real estate developers and providers of services, such as medical, legal, and personal services. Most important, no personal exemptions are provided. PDF page 25-27: *** SNIP *** 5. Figure 7 compares the impact of the two tax reform proposals on investment. The impact of the Flat Tax in 1996 is to depress investment by 8.6 percent, relative to the Base Case. Investment recovers over time, eventually reaching a level that is only 1.7 percent below the Base Case in the year 2020. Substitution of the Sales Tax for existing income taxes generates a dramatic investment boom. The impact in 1996 is a whopping 78.5 percent increase in the level of investment that gradually gives way by the year 2000 to a substantial increase of 16.5 percent, relative to the Base Case. *** SNIP *** 8. The implied subsidy to leisure time is equal to the marginal tax rate on labor income and would drop to zero when the individual income tax is abolished. Individuals sharply curtail consumption of both goods and leisure under the Sales Tax. Figure 12 shows that labor supply (and demand) jumps initially by thirty percent in 1996. This labor supply response recedes to a level of around fifeen percent by 2020. By contrast the Flat Tax generates an increase in both consumption and labor supply. The labor supply response is only two percent in 1996, but gradually rises to more than five percent by 2020.
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No that has nothing to do with that curve. The curve shows that as people make more money they have a tendancy to work less and take more leisure time. Your spin is totally off base and is not what the research found.
backward-bending labor supply curve: A labor supply curve that is positively-sloped for relatively small quantities of labor and negatively-sloped for relatively large quantities of labor. In other words, workers supply larger quantities of labor in response to a higher wage when the wage is relatively low. However, when the wage reaches a relatively high level, further increases in the wage entice workers to reduce the quantity supplied. The supply curve thus bends back on itself. The reason for the negatively-sloped, backward-bending segment rests with the tradeoff between labor and leisure. Workers decide to "spend" a portion of their higher wage "buying" more leisure time, and thus working less. The end result is that the higher wage decreases the quantity of labor supplied.
Nothing to do with your lame spin. In fact, it says exactly the opposite of what you said.
Workers decide to "spend" a portion of their higher wage "buying" more leisure time, and thus working less. The end result is that the higher wage decreases the quantity of labor supplied.
Jorgenson:
8. The implied subsidy to leisure time is equal to the marginal tax rate on labor income and would drop to zero when the individual income tax is abolished. Individuals sharply curtail consumption of both goods and leisure under the Sales Tax. Figure 12 shows that labor supply (and demand) jumps initially by thirty percent in 1996. This labor supply response recedes to a level of around fifeen percent by 2020. By contrast the Flat Tax generates an increase in both consumption and labor supply. The labor supply response is only two percent in 1996, but gradually rises to more than five percent by 2020.
The curve shows that as people make more money they have a tendancy to work less and take more leisure time.
Certainly that is true in an graduated income tax case where the incentive to take more leisure and work less rises with the marginal tax rate on their income.
As long a person perceives that leisure on the margin is worth more to them than working the additional time,l yes people do work less and take more leisure.
As Jorgenson points out, changing to a retail sale tax, or even a Flat Tax changes the incentives by reducing the maximum marginal tax rate, coupled with not taxing income going to investment in the rertail sales tax case the value of working becomes greater increasing the amount of labor at the expense of time devoted to leisure.
Your spin is totally off base and is not what the research found.
False assertions no matter how often repeated, continue to be false.
Jorgenson seemed to have ignored the effect of a backward bending labor curve and you don't seem to understand that it has nothing to do with marginal tax rates. And no matter how many different ways it can be explained to you, you will always be in denial of the concept.
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