I’m not talking about that. I’m talking about targeted taxes and tax breaks designed to influence behaviour in what someone else thinks is the ‘correct’ direction. Tax breaks for hybrid cars, tax breaks for hiring the right kinds of people, tax breaks for various investment options, tax breaks for growing the right crops, making the right kinds of products, or setting up shop in a particular place.
Some of these are attempts at industrial policy (R&D tax credits, tax credits for investing in new production, etc). Some are attempts at curbing ‘incorrect’ behaviour (sin taxes), and some are backdoor attempts at trade war (tax breaks for exported goods). They’re all bad. They all have as the premise that the government knows best what the people want or need than do the people themselves.
There’s more complexities there than you might see at first glance.
My case for example. I don’t consider myself rich but we’re pretty well off. I’m own two businesses (and am launching a third). Lady Chance is a software developer. We’re doing OK.
Our house is about 4000 square feet on four levels, basement, living level, bedroom level, finished attic for the home office. Well enough. We’d certainly qualify for losing our mortgage interest deduction under this law. I freely acknowledge that.
But we bought the place for $80,000 three years ago. We live in a not-quite-depressed but certainly melancholy county in rural Ohio and housing prices are through the floor because there’s been a 20 year trend of people leaving her to head for Columbus, Cleveland and Charleston to find work. So even if I lost my mortgage interest deduction it wouldn’t have a huge impact on us. It’s not like we rack up tens of thousands in interest each year.
There seems to be a preconception here that the mortgage interest deduction is some kind of subsidy for homeownership, but I don’t see it that way.
Our income tax scheme is set up to tax income received, minus the costs of getting that income. If you have a business that has $1 million in revenues, but $900,000 in expenses, you’re only taxed on the $100,000 remainder. If you’re a bank and get a million dollars in interest income, but have to pay out $900,000 in interest to your deposit accounts, you’re only taxed on $100,000. If you take out a loan for the purpose of investing it and making money, you get to deduct the interest paid on that loan (to offset the gain you realize from the investment).
Housing is seen as an investment, therefore the interest you pay out is deductible from your income. In fact, every proposal I’ve ever seen that would do away with the home mortgage deduction, would also have to balance that by eliminating income tax on interest received.
In our system, if interest income is taxed, interest paid out has to be deductible.
Refresh my memory here. IIRC, we used to be able to deduct any interest we paid from our income taxes as long as we were itemizing. Is that right? Then, sometime in the 80s, the rules changed and we could no longer deduct things like interest paid on credit cards or other personal loans. Were we also able to deduct interest on things like car loans? I can’t recall the details.
At any rate, what a lot of people do is consolidate their debt into their home loan so as to be able to deduct as much interest as possible.
But, as I stated earlier, I’m with Sam Stone on this-- get rid of the mortgage deduction altogether. You can’t fool “the market” and homes are priced at what people are willing and able to pay. By allowing interest to be tax deductible, you just raise the value (and the price) of the house.
I’m very curious as to whether the bill would allow owners of green homes in excess of 3,000 square feet to keep their mortgage interest deduction. If the intent here is to push people to conserve energy, then the yardstick should be the efficiency of the house, not its size. I’m willing to bet that good construction methods can make a large house much, much more energy efficient than most of the houses I see here in DC: most in my area are still using 1920s construction technology, and heating oil is quite common. I don’t see the logic in the government “subsidizing” highly inefficient small homes and not “subsidizing” a house that may be very energy efficient, yet brimming with solar panels, argon filled windows, and whathaveyou.
And FTR I think getting rid of the mortgage interest deduction is a dumb idea all around.
He may be thinking about the energy that used in simply building the house to begin with. Now, it’s probably possible to use “green” construction techniques, but size is probably a pretty good indication of construction green house gas emissions.
Why? Is it because of the disruption it would cause, or do you think it was a good idea to implement that part of the tax code in the first place?
This sounds like one of those things you propose, knowing that there’s no chance in hell of it ever passing, but needing to tell your constituents that you proposed it so they’ll vote for you in 2008.
Getting rid of the deduction would be a distortion of the market.
Here’s a question: Let’s say you have a $200,000 outstanding loan on your house, at a 5% interest rate. You happen to also have a bank account, just sitting there, with $200,000 in it, and drawing 5% interest. Would you be better off keeping the loan in place, or using your savings to pay it off (ignoring liquidity concerns etc.)?
I think many people here would say that you should keep the loan and the savings in place, with a reason that the mortgage interest deduction somehow benefits you. But it doesn’t - the interest deduction you get on the mortgage is exactly offset by the tax you have to pay on the interest from your savings account.
If the mortgage interest deduction were eliminated, it would add a distortion to this investment decision. I think that generally, the tax code should avoid causing people to decide how to invest differently, and just let people make good business decisions and then tax the profits. It’s bad policy to influence investment decisions for tax avoidance reasons.
On the other hand, it would still balance if the mortgage interest deduction was eliminated, as long as interest income is exempted from taxation. I just don’t think many people here are ready to advocate that interest income be tax-free.
Your analysis ignores the appreciation in the value of the home. Where I live, that’s much more than 5% per year.
I agree that getting rid of the interest deduction would be very disruptive. What I should have said is that we never should have implemented it in the first place. But we’ve made similar changes to the tax code before-- you just have to phase them in and do them intelligently.
I disagree, because the mortgage interest deduction’s very existence distorts the market. Getting rid of it would put the market back to where it would be without governmental influence.
But it’s beside the point, isn’t it? Whether you keep the loan in place or pay it off, you’re still going to be the homeowner. The only decision I was proposing was whether to use your savings to pay off the mortgage.
I wasn’t saying that eliminating the deduction would be disruptive, or simply a change in the status quo. If it didn’t exist, that’s a distortion of the market for reasons I outlined before, and whether that distortion was created now or many years ago is beside the point.
I think the disruption is ample reason to oppose getting rid of it, but I have no problem with using the tax code to encourage certain types of financial activities that I think are generally good things. I think it is a good idea that the government excludes from taxation certain amounts of savings for retirement, for example. Yes, that distorts the market for IRAs, but I think in a good way: it provides further incentive for individuals to invest and probably lessens the number of people who might otherwise be heavily dependent on Social Security in their old age.
Similarly, I think you’ll find few people who will disagree with the axiom that one’s house is the best investment someone will ever make. With all due respect to renters, many of whom think that they are treated unfairly by the tax code, but I fail to see why renters and buyers shouldn’t be treated differently when their financial benefits, both personally and nationally, aren’t the same. Providing an additional incentive to do something that is good to do – but also initially financially difficult to do – seems like a very modest proposal. What’s more, seeing as how more and more people are getting hit with the AMT, it isn’t like the interest deduction is allowing some more wealthy taxpayers to get away with something outrageous.
Yes, it’d get the market back to the 19th century where it belongs?! The income tax is a distortion of markets. Property taxes are, too, as well as zoning restrictions and building codes. When we’re talking about distortions of the market, why is deducting mortgage interest bad, but zoning good? Or do you oppose zoning laws and building codes, too?
OK, but that’s a false dichotomy because there are many other things you could do with the money.
Is it a distortion in the market if people aren’t allowed to deduct the interest paid on auto loans? What about credit card interest?
You seem to be saying that just because both things are called “interest” that they need to be treated in some way to offset any effect that one has that the other doesn’t. Any interest paid to the mortgage company and that creates a profit for that company will get taxed at that point.
Depends on who you are. I bought my first house in 1985 for $70k, sold it in 1991 for $72k. Bought my second in 1991 for $175k, sold in 2001 for $210k. Bought my third in 2001 for $325k, and it’s now worth maybe $340k. These are typical for the area.
These kinds of returns are far less than you would have gotten from any other standard investment. But they had an upside - I couldn’t live in stock certificates.
A false dichotomy fallacy is saying that those are the only two choices, but it’s not a fallacy to compare two valid choices with each other. I don’t see where you’re going with this angle.
Yes. But it’s a small distortion that we don’t think much about.
If the home mortgage interest deduction is eliminated, interest income will be exempt from taxation. Just take a look at any serious proposal ever been done to eliminate the mortgage deduction. They all exempt interest income. They go hand-in-hand.
I don’t think so. If you put 20% down, that means your initial investment is $35,000. The total gain is $210k - $175k = 35k. That’s a 100% gain over 10 years or about 7% a year.
Nice strawman, Ravenman. What I was pointing out was that if it is bad policy to make investment decisions based on tax avoidance - and I agree that it is - and if a house is an investment, which most people agree that it is - than it distorts the market to allow the mortgage interest deduction. The market comes to equilibrium with or without the mortgage interest deduction subsidy.
The income tax is a distortion of markets. Property taxes are, too, as well as zoning restrictions and building codes. When we’re talking about distortions of the market, why is deducting mortgage interest bad, but zoning good? Or do you oppose zoning laws and building codes, too?