Posted on 03/28/2014 7:03:46 AM PDT by SeekAndFind
In the coming weeks, Americans will spend an average of 13 hours and $210 to prepare their federal taxes. Beyond the compliance burden the federal tax code imposes, it also distorts economic activity and discriminates against some taxpayers in favor of others. But one of its most egregiously unfair provisions is also among its most popular - the mortgage interest deduction.
In theory, the mortgage interest deduction is supposed to encourage home ownership, a questionable goal for government to begin with. The purpose of taxes is to raise money to finance government services, not to manipulate human behavior or economic activity.
When lawmakers tell taxpayers that they can keep more of their money – but only if they spend that money the way politicians want – it’s just as much an exertion of government power as a spending program.
Allowing individuals to deduct mortgage interest payments drives up taxes on other Americans given the need to recoup the lost revenue, or, alternatively, adds to the deficit. The mortgage interest deduction itself drains $100 billion annually from the U.S. Treasury. When other tax policies meant to encourage home ownership are added - including the deductibility of state and local property taxes and the exemption of capital gains taxes from selling a home - that number rises to $175 billion.
But even if one were to accept that boosting home ownership is a worthy goal for government, the interest deduction and accompanying tax benefits for homeowners should be seen as a miserable failure. That's the conclusion of economists Andrew Hanson, Ike Brannon, and Zackary Hawley in a study prepared for the R Street Institute, a right-of-center think tank, and published in National Affairs.
The authors took a detailed look at the distribution of existing tax benefits for home ownership and found that the benefits do more to help wealthier Americans purchase larger homes than they do to encourage lower-income Americans who otherwise would be renting to purchase homes in the first place.
The study found that in Atlanta, Denver, Detroit, Minneapolis, Philadelphia, Phoenix, Seattle and Washington, D.C., 80 percent of taxpayers earning more than $100,000 claimed the deduction, compared with just 25 percent of those earning less.
In monetary terms, the deduction is also significantly more valuable for higher-income households.
The deduction applies to mortgage debt of up to $1 million and debt from second homes can count toward that amount. Furthermore, because high-income earners are taxed at a higher rate, each dollar of earnings they get to deduct from their taxes is worth more.
A family with a household income of $500,000 with $1 million in mortgage debt being financed at 4 percent would generate $16,000 per year in tax savings, according to the authors’ calculations. In contrast, a household earning near the national median income of $51,000 with a home worth $221,000 (the median price), would receive tax savings of one-tenth that amount.
There are several leading objections to scrapping the mortgage interest deduction. One is that it would drive down home prices. Another is that American homeowners already purchased homes and did tax planning on the assumption that the tax benefit would be in place.
As to the first argument, while it’s true that limiting or eliminating the deduction would reduce the artificially inflated value of homes, that would be true of homes everywhere. That means homes would be cheaper for people shopping for new homes, as well as those hoping to sell their current homes and purchase new ones.
Also, proposals to reform the mortgage interest deduction can be designed to phase in the changes over time, so that homeowners can gradually adjust.
Recently, House Ways and Means Chairman Rep. David Camp, R-Mich., offered a comprehensive tax reform proposal that would allow individuals with existing mortgages to keep the deduction as is, while gradually reducing the cap to $500,000 for new mortgages. Another idea proposed by the authors is to change the deduction to a flat rate tax credit, to “limit the subsidy provided to upper-income taxpayers while simultaneously expanding it at the lower end of the income distribution.”
My preferred approach would be to slowly phase it out over time as part of a broader tax reform that lowered tax rates for everybody.
If you're going to call names, don't bother engaging me in debate.
Here's what the National Association of Home Builders has to say on the point I referenced. They're not exactly a bunch of "union friendly" goons. It's telling you didn't bother factually rebutting what I said prior to resorting to name calling.
I'll put you on the list of "People I no longer bother engaging on FR because they're incapable of having a civilized conversation."
Have a nice day.
Tricks such as twice monthly payments (splitting your mortgage payment in half, making two payments a month) helps accelerate payoff and saves you money. So does making one extra payment a year, provided you direct that payment to cover principal with your mortgage holder.
On a typical 30 year mortgage, making one extra payment a year (directed towards principal) cuts the mortgage term to 21 years until pay-off.
Isn't that special?
You are completely out of your mind. "Force?" ROFL! Seek help. Seriously. You used to be a respected poster here on FR. Look what you've reduced yourself to. You are absent any logic or reason in such statements. Seek help.
Go back your union thug meeting.
The STD Deduction for 2013 was $6,100 per individual. Unless a married couple filing jointly has mortgage interest of $12,200 or more then the mortgage deduction is useless.
New homes only.
Just another liberal move to get more of the people’s money.
As Rush says: Those in Congress see every dollar as their dollar and anything we keep they let us keep.
Our government is out of control.
Correct, and only bad things can happen from there.
5.56mm
Unless I am misunderstand the differences, there are no similarities between the revenue generating mechanism of the Flat Tax and the FairTax.
I know you are an accountant Ray, and I appreciate your thoughts on this matter, and your support for the FairTax. As a CPA, you are much closer to the problem than I am, but let me share my thoughts with you.
Flat Tax is an income tax. Forms have to be filled out and determination of income must be made so the tax can be determined. IIRC, the determination of income is what about 90% of the IRC is all about, and is probably 100% of the IRS disputes are about (legal deduction or not = more or less income to be taxed?).
What is different other than a flat rate and no deductions? Not to mention how angry the IRS folks are gonna be when Americans are allowed to send them a post card sized form and a check for “all the taxes they owe” without having backup data.
Talk about an auditor’s wet dream!!!
FairTax is paid by retail merchants to state sales tax agencies just as they now pay state sales tax. No muss, no fuss. Retailer experiences $xxxx.00 in sales, collects $yy.00 sales tax and sends it to The Man.
Think of how many non-retail-business-owing Americans will FOREVER BE FREE OF THE IRS!
That single factor is worth whatever we have to do to pass FairTax!
“On a typical 30 year mortgage, making one extra payment a year (directed towards principal) cuts the mortgage term to 21 years until pay-off.”
—
I was give a 30 year mortgage and I was 75 years old-—pretty funny.This was before the bottom fell out of the market. I only financed 30% of the cost of my condo because I needed some cash on hand-—I finance nothing else.
Thanks for your good advice.
.
I believe there will still be withholding, but with such simple tax forms (it’ll make the IRS 1040EZ look complicated in comparison!), my modified version of the Forbes flat tax plan means a 75% reduction in yearly tax compliance costs—instead of around US$500 billion per year, it’ll be more like US$125 billion per year, freeing up US$375 billion per year now spent on tax compliance for more productive economic activities. What will the US economy be like with US$375 billion per year of liquidity freed up?
Interesting conversation you are having regarding
a true flat tax as a transition to a national sales tax.
In addition, a flat tax could be implemented by a “simple”
act of congress and not require a constitutional amendment.
I intentionally use the phrase national sales tax
as I am put off by the pre-bate feature of the fair tax.
There ya go - root-cause solution.
Repeal the Sixteenth Amendment.
Thanks. Glad you are enjoying it.
FairTax does not require a constitutional amendment to implement.
The politicos deem the pre-bate necessary so as to minimize the class warfare argument that the FairTax is regressive and will hurt “the poor.”
I despise the class warfare argument that LIEberal scoundrel politicians have used during my entire lifetime (72 years) to ensure they stay in power.
I really had hoped that the CW argument would have been scrapped long ago, but instead, it has gained momentum.
FairTax takes a large slice out of that argument by “leveling the playing field.”
So, the politicos reckon that by rendering the basic necessities of life tax-FRee for all families, irrespective of size, the FairTax has a better chance of passing.
And, once people are educated to the purpose of the pre-bate, resistance moderates.
“... FairTax does not require a constitutional amendment ...”
-
If a national sales tax was going to REPLACE the income tax,
a constitutional amendment would be needed, lest we end up being subject to both.
A flat tax on income, however, could be done by congress, if they had the requisite testicles.
In my thinking...
The advantage of a flat tax is that congress could do it;
and the disadvantage is that the IRS would survive.
The advantage of a national sales tax is that the IRS would vanish;
and the disadvantage is that a constitutional amendment would be required.
Also remember that anything one congress does, another congress can undo.
I don’t believe withholding is a good idea for the American Taxpayer. HST, it is a GREAT idea for the Fed! I believe if more people were forced to write a monthly check to the Fed, there already would have been massive tax reform, and it is highly possible, FairTax would be the law of the land today.
Back in the day (1995 - 2004) when I was an active lobbyist for the NRST, I recall reading a number of studies written by prominent economists who estimated that the cost to the US economy of the progressive income tax was as much (estimates varied) as $1.00 for each dollar of taxes paid in to the Treasury.
It probably is not that much, but the IRS has had a constant estimate of the “cost” of the system to the economy of your referenced $500 billion for at least 30 years. You know that is not the case! It is upwards of $1 Trillion, and probably closer to $2 Trillion.
AND, we know that Ophonybamacare will raise it even further!
What would the US economy look like when the $13 TRILLION that is parked off-shore by US corporations avoiding the onerous US corporate tax is repatriated?
What would the US economy look like when the $(pick a number 1? 2? 3?) Trillion burden of the present income tax system is eliminated?
And, how much happier would the average American be when April 15th becomes just another nice spring day?
And, members of your profession would be happier, richer and have a better love life, particularly FRom January to April 15!
There is a good discussion of this issue on the FairTax web site at http://www.fairtax.org/site/DocServer/TheFairTaxReducesComplexityComplianceCostsAndNoncomplian.pdf?docID=601
Take my word for it — the 16th Amendment does not have to be repealed to implement the FairTax.
Read the legislation; it specifically abolishes the income tax and de-funds the IRS.
16th Amendment is permissive; it does not mandate an income tax.
Public pressure is as we speak keeping Congress FRom implementing a VAT or an NRST on top of the income tax.
Public pressure, BTW, is what we need to help Congress grow the cojones to pass the FairTax and abolish the income tax and the IRS.
WE need your help: http://www.fairtax.org
We are back to the only weapon that works to keep Congress in line: public pressure.
And periodic elections.
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