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.
You don’t actually “own” the thing until you finish paying for it. So you think it’s a good thing to encourage someone to take on a large debt just because they can deduct the interest on the loan, even if they can’t really afford the loan in the first place?
take away HER ability to buy clothes. do you know what WE paid for just 1 dress? Haven’t found the article on the mutts staff, plane, care etc. Sure it is high. Private plane just for their mutts. GWB took his dogs on with him, not on a special plane.
Mooch’s $12 K dress WE paid for.
http://townhall.com/tipsheet/katiepavlich/2014/02/14/the-irony-of-michelle-obamas-10000-dress-n1795008
Keeping Track: Obamas’ Vacations, Take 2… or 20!
http://clashdaily.com/2014/03/keeping-track-obamas-vacations-take-2-20/#K4xUZiWkiVX7YzgY.01
U.S. Gov’t Study Pays Mexican Male Prostitutes For Not Getting STDs - See more at: http://cnsnews.com/news/article/eric-scheiner/us-govt-study-pays-mexican-male-prostitutes-not-getting-stds#sthash.5CgoGk8w.dpuf
http://cnsnews.com/news/article/eric-scheiner/us-govt-study-pays-mexican-male-prostitutes-not-getting-stds
MORE WASTEFUL SPENDING!
http://www.cnsnews.com/news/article/eric-scheiner/govt-spending-48m-tell-students-get-fruved $4.8 MILLION to tell Students to ‘Get Fruved’
Medicare And Medicaid Fraud Is Costing Taxpayers Billions
http://www.forbes.com/sites/merrillmatthews/2012/05/31/medicare-and-medicaid-fraud-is-costing-taxpayers-billions/
Report: 125,000 illegals in California qualified to be covered by Medicaid
http://americanthinker.com/blog/2014/02/report_125000_illegals_in_california_qualified_to_be_covered_by_medicaid.html
Obamas’ Cost of Living in the White House: $1.4 Billion a Year
http://townhall.com/tipsheet/katiepavlich/2013/03/11/obamas-cost-of-living-in-the-white-house-14-billion-a-year-n1530802
That’s not even the tip of the iceberg of our money that the government squanders.
Agreed—though some taxing is inevitable.
And the end of withholding is a good start: I was a Democrat before starting my own company ay age 35.
Politicians would love to simplify the tax code - temporarily. Then they could restart the process of sucking donations out of those wanting their special deductions.
The majority of most Republicans net worth is their house. Most Democrats rent, and they mostly live in communal cities. Attacking the mortgage deduction is just the city communists attacking suburban life. They want everyone to move into a highly regulated gun-free commune, share their wealth with others, and live in equal misery under the thumb of the machine gun wielding no-knock jackboots.
That point’s been made twice now. I’d vote for that! :)
People like Hollande and the Obamas are either elitist hypocrites or they don't really believe in the socialist policies they preach about and implement for the rest of us.
Ding! Ding! Ding!
If you pay the grand for rent, it's gone forever, and you've had a place to live. If you pay a mortgage you've had a place to live, you will eventually build equity; in a normal RE market you eventually get some appreciation.
I wonder if CA has a base rate that goes to the state, and municipalities have the option of adding up to some amount; I recall paying 8 percent on a soft drink at some convenience store, probably in C of Industry.
I believe that is the case.
And eight percent? You’re getting off light; here in San Jose between state, county and municipal sales taxes it’s 8.75%.
Fair enough, but does that still justify a tax deduction for mortgage interest? IIRC, you don’t get a deduction for interest on a margin account when you buy stocks on margin.
Thank you for the ping, TADSLOS.
Before posting the FairTax answer to the question raised, I should remind FReepers of what the FairTax is:
“The FairTax is a single-rate, federal retail sales tax collected only once, at the final point of purchase of new goods and services for personal consumption. Used items are not taxed. Business-to-business purchases for the production of goods and services are not taxed. A prebate makes the effective rate progressive.”
HST here is the FairTax response to the question “What about the home mortgage deduction?”
[go to http://www.fairtax.org/site/PageServer?pagename=FAQs for answers to other questions you may have re: FairTax]
“The FairTax has positive effects on residential real estate far beyond this narrow question. Today’s homeowners, if they itemize (and 70 percent do not), pay their interest with post-Social Security/pre-income tax dollars. They then pay their principal with post-SS/post-income tax dollars. Those who do not itemize get no advantages at all. Under the FairTax, all homeowners make their entire house payment with pre-tax dollars.
“With the FairTax, mortgage interest rates fall by about 25 percent (about 1.75 points) as bank overhead falls; this is a huge savings for consumers. For example, on a $150,000, thirty-year home mortgage at an interest rate of 7.00 percent, the monthly mortgage payment is $999.12 for principal and interest. On that same mortgage at a 5.25 percent interest rate, the monthly payment is $830.01. Over 30 years, the 1.75-percent decrease in interest rates in this instance results in a $60,879 cost savings to the consumer. Finally, first-time buyers save for that down payment much faster, as savings are not taxed.
“Under the FairTax, home ownership is a possibility for many who have never had that option under the income tax system. Lower interest rates, the repeal of the income tax, the repeal of all payroll taxes, and the prebate mean that people have more money to spend and have an increased opportunity to become homeowners.”
The floor is open for questions.
Gotta disagree with the article
1. scrap the income tax is the best answer
2. beyond that, tax ONLY profit. ALL utilities and property expenses aren’t even counted as income. They are expenses.
Why not replace the income tax with the FairTax and abolish the IRS?
That’s my first choice.
But, if we’re gonna keep shoving this monstrosity down people’s throats, then let’s treat a “household” as a business enterprise trying to make a profit.
I agree!
Throw the ENTIRE Marxist income tax code onto the ash heap of history and replace it with what the founders universally endorsed! Taxes on articles of consumption! The bills to do that (HR25/S122) are already before congress and only need your support to become the law of the land!
In addition to the fair tax, and the repeal of the 16th amendment, there needs to be an amendment that prevents any exemptions to the tax and increases in the tax without a 3/4 majority of congress and the state legislatures agreeing, with the right of any state to not participate.
2. Will never happen
There are so many ways to calculate "profit," never mind the myriad ways to calculate inventory.
A consumption tax is the most transparent and simple you could hope for, but what would happen is we would keep all the other taxes and just add a consumption tax on top of them all.
The only way to change anything is to nuke Washington when Ubama is giving a speech to both chambers of congress.
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