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.
Here’s my plan - eliminate withholding and move tax day to October 31.
Think about it.
And put Tax Lawyers and Accountants out of work?
Never happen.
That might be, but the purpose of the tax code is strictly about manipulating behavior.
This old idea is nothing more than offering a bait and switch. The bait is lower taxes overall but the switch is that taxes never go down or away. The fed is not the only taxing entity that takes money from us for carrying a mortgage. State, county, local all have fingers in the pie. If anything, taxes would go up at those levels.
Oh, and as to your statement about responsible people?
Those are EXACTLY the people that Obama seeks to cut off at the knees. EVERY policy of his has that intent and effect.
Simple. Evil. Perfect. *SMIRK*
It’s SO depressing to look at my paycheck stubs even though I put every DIME I can into pre-tax dollars for my 401K and my health care!
“Those are EXACTLY the people that Obama seeks to cut off at the knees.”
I’m only 5’1”. I’m fighting THAT, too, LOL!
Analyze this math -
100k loan at 3.5% interest.
Interest is tax deductible making it actually around 2.1%.
Inflation is 4-7%.
Who’s paying whom?
Need to do away with all deductions and go with a flat tax.
Have one personal exemption equal to the poverty line of about $12,000 and every dime after be taxed at one flat rate.
Married single one kid or 20, every dime after the personal exemption is taxed.
That would instantly end the class warfare and it would assure that liberals couldn’t get elected on ‘taxing the rich.’
It would be damn hard to get support for raising taxes if everyone paid the same rate.
It would also force high tax liberal states to fund their own BS ideas, because those high state and local taxes wouldn’t be deductible!
IMO, you wouldn't need to move the date. If withholding went, away, everything else would take care of itself. Do some research sometimes on the legislative debate when it was first enacted in 1943. The title is the "Current Payment Tax Act of 1943."
Moving the date is just my frosting on the cupcake.
Election day is a week after that, usually.
The purpose of taxes is to raise money to finance government services, not to manipulate human behavior or economic activity.Heh. No legislator thinks that is the function of taxes or any other law. All of the laws aim to regulate behavior, ESPECIALLY tax laws.
There seem to be an awful lot of people who don’t understand that if you pay $1000 for a tax deductible expense and it saves you $200 in taxes, you’re still out $800.
“California for example used to have a different sales tax rate in each suburb, as I recall from my 1984 trip to LA.”
The situation with sales tax is similar here in the Bay Area, and probably statewide.
The majority of most people’s net worth is their house. Doing away with the mortgage deduction will decrease the value of their largest asset.
Doing away with the mortgage deduction would be right up there with confiscating 401k accounts as a way to harm working people.
I’ll agree to that as soon as the legislature names one useless government agency they are going to shutter. Let me help them choose: EPA, TSA, Dept of Educ, DHS take your pick.
Time to scrap the income tax. Period.
The Tax code - and special interests trying to game it - are a HUGE source of corruption in washington.
Flat tax - personal and child deductions only. NOTHING else.
Actually, I would trade away all the deductions, etc., if withholding were abolished.
http://www.taxhistory.com/1943.html
http://www.taxhistory.org/civilization/Documents/Withholding/hst29051/29051-1.htm
http://www.americanthinker.com/2013/03/repeal_the_current_tax_payment_act_of_1943.html
http://object.cato.org/sites/cato.org/files/serials/files/cato-journal/1995/1/cj14n3-1.pdf
EVOLUTION OF FEDERAL INCOME TAX WITHHOLDING: THE MACHINERY OF INSTITUTIONAL CHANGE
Yup.
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