Do you think this is likely to happen? Is this a wise way to raise revenue? I can see this piggybacking on the desire to raise taxes on the rich.
I don’t see why there’s a deduction in the first place, it’s mostly benefitting upper middle class homeowners and the mortgage companies. In order to take advantage of it I’d have to have around a $200K home and even then the benefits would be (literally) marginal.
If they really wanted to promote home ownership, they’d make it an above the line deduction with a cap of say $2000, applicable only on the primary mortgage for your “first house”. This would still help a substantial number of upper middle class people while not being a complete giveaway to those with absolutely huge houses.
That article is dangerously light on sources.
I’m becoming more interested in the 401(k) tax benefit (even though I benefit enormously from it). From what I’ve been reading it’s an extremely expensive tax expenditure that doesn’t appear to really encourage retirement saving all that much (I can dig up some cites if folks are interested). All it really does is give a big tax break on folks that have enough money to save, and who would almost certainly do so anyway (read: upper-middle-class and higher).
Talk about politically difficult fights, though. Removing the 401(k) benefit would make killing the mortgage interest deduction look like a walk in the park.
I wouldn’t mind the 401(k) being scaled back or eliminated going forward as long as the Roth IRA is still in existence, AND taxes are raised on the super rich who pay far less than I do as a percentage, even on stuff that really should be income such as hedge fund managers and stock bonuses that are paid out even when the company does bad. Otherwise it would be another case of upper-middle class (and the almost-there like myself) getting boned at the expense of the rich (and the very few actual “takers” on the lower end of the scale, but they are small potatoes.)
The idea is that if you are making investments, then the money you make as income on the gains or interest is taxable, and therefore money you have to pay out gets to be deductible. If you borrow at 6% interest, a million dollars, to make an investment of that million and get an 8% return, then you’re taxed on the 2% net that you actually are making - your interest on a loan to make an investment is deductible.
Houses have been considered investments, so the money you have to pay in interest to get one has been deductible.
However, the standard deduction has been creeping up over the years, so that fewer and fewer people benefit from the mortgage interest deduction. People who are knowledgeable of this have been saying (for 20 years that I know of) that when the standard deduction gets high enough that most people can’t benefit from it, the government will take it away.
What this means is that the balance between your personal investments and your mortgage has shifted. Previously, if you had a mortgage for $200,000 at 5%, and you had $200,000 invested somewhere at 5%, then it doesn’t matter whether you keep it that way or pay off your mortgage - the dollar value to you is equivalent.
If the mortgage interest deduction goes away, it will tip this balance, so you will benefit from taking your money out of the investment and paying off your mortgage. Overall, you’ll see fewer mortgages and less money in the money markets.
The mortgage interest deduction should never have been there in the first place, but taking it away now will negatively affect the price of real estate at a time when there is still a severe risk to the economy from all the underwater mortgages. It seems like the wrong tax loophole to get rid of right now.
The 401(k) deduction is interesting. Most countries have something similar. In Canada we have Registered Retirement Savings Plans that work the same way - any money you put into it is tax free until you withdraw it, at which point you pay income tax on it.
The thing is, when I withdraw that money at retirement, it will be counted as income, and that income will be used to reduce other benefits I would get as a retiree. So if the government removed my incentive to save, it might earn them a bit more tax money now but when I retire I’ll be eligible for more government benefits and they’ll be giving me that money right back.
That’s the problem with deductions - once you implement them the market adjusts to them and people adjust their behavior accordingly. That makes taking them away very difficult without causing major dislocations. The housing subsidy is baked into the price of homes. Take it away, and home prices fall. RRSP or 401(k) contributions help prop up the stock and bond markets. Take them away, and those prices fall. None of it’s going to be easy.
The thing they are talking about doing is lowering the cap - so if your mortgage is $499,999, the interest would still be fully deductible. Right now the cap is there at $1M. $500k is a lot of mortgage, and I’m not sure that the government should be in the business of subsiding mortgages for the upper middle class (or the wealthy).
I’d think that would majorly destabilize the stock market and therefore economy. 401ks create a large initial mass of money into the system, that is largely non-volatile.Dependable monthly dumps mostly into funds that managers have to put somewhere. And it often stays there for years untouched.
If putting money into 401ks was discouraged, and the percentage of money in the market that was active players increased, along with the ever increasing computer trading which didn’t exist before 401ks were created, It would become an untrustworthy roulette wheel of volatility.
Where I live if you have a $200K home you are either living in a garage or a one room shack. The standard 3 bedroom 1200 - 1500 sq ft house in my development, with a small yard, is about $500K.
From an article in the Murky News this morning, it seems that most people don’t take the deduction since they don’t itemize, and that those who do make over $100K. Around here it will hurt, since most people buying new houses do take it. Maybe there should be some kind of sliding scale by zip code.
One thing I saw proposed I’m very much for is the deductibility of home equity loans. They are dangerous things. They should still have lower interest rates if the borrower has enough real equity, but discouraging them is a good thing.
I disagree. First, the cost of 401Ks to the government depends directly on how much is deposited in them and thus their benefit to retirement saving. I agree that there hasn’t been enough savings, but that also means the revenue hit hasn’t been as high.
I absolutely disagree that people would save as much anyway. Thaler’s work on default 401K deposits and their effect on savings rates show that people don’t act rationally about this. Deposits in an account from which money is difficult to remove puts the money into a very different mental bucket than money deposited into a standard savings account. How many people are not going to raid it for emergencies or perceived emergencies.
Also, how would you map employer contributions into a new plan? 401K employer matches were a substitute for pension payments. You think employers would just give raises? You think that money, even if it did happen, would get saved until retirement?
Or the people who live in the SF Bay Area ;)?
Probably won’t happen, but if such a plan is implemented some geographic adjustments might be reasonable.
I’m not that worried about people who would be psychologically cause to save less. The minimum social security benefits are quite generous as it is as long as you own your house.
I personally, if I recieved the bonus as a wage instead of 401K, would save just as much gross money – perhaps even more, because it is not tax-advantaged other than the delay and recharacterization of capital gains, I need to save more in order to receive the same returns.
Don’t get me wrong, I receive a huge benefit from it, especially since without it I’d be paying an unbelievable percentage of my income to the federal government as a single guy with a high 5 figure income. (As it is, it’s still much higher than Mitt’s, even if you count my 401k contribution as current income, which you shouldn’t because I’m gonna be taxed on it eventually anyway.) It’s just that I would be willing to give some of it up if it was needed as a part of a well-rounded revenue increase plan that hit in a lot of other places at the same time.
I don’t think the 401(k) thing is a big deal. Even if future contributions are taxed, it’s not like you’ve lost anything; just socked away some extra retirement money.
On the other hand, any number of people (including my wife) relied on the mortgage interest deduction when they bought houses. I don’t really have a problem with the cap reduction (though in light of Voyager’s post, maybe the cap should be indexed to the average home price in the area you live); $1 million is an awful lot of house no matter where you are.
General ? about the mortgage deduction: Is it correct that the US is the only industrialized nation with this deduction?
In Manhattan it’s a 1-bedroom 1000 sq ft apartment. And that’s if you found a good deal (there are 500 sq ft apartments that go for $1M too).
See http://www.urbandigs.com/2008/03/the_million_dollar_mansion_wha.html
I think it would be salubrious if the government would set a phaseout point at $250,000 at which the allowable deductible amount would begin to decrease, phasing out completely at $400,000. This deduction was supposed to allow lower-income families to enter the market, it was never intended to help soften the sting of buying a ginormous McMansion.
Though I do understand the deduction has skewed the market to where you need a super-jumbo mortgage to buy a livable house in some areas. For cases like this I’ve always been in favor of some kind of relocation deduction to help people move into more realistic situation (whether into a better housing market, a better employment market, or whatever).
Yeah, $500k doesn’t you you much around here. The median home price in Santa Clara County is higher than that (or just about there). Presumably, you would be able to deduct interest on the 1st 500k, and then no deduction after that.
But I agree with Sam-- it should never have been implemented. The market isn’t stupid, and it will adjust the price to take into account the deduction.
I saw the same article. Most of the tax benefit goes to upper income people, which should be no surprise. I doubt we would see some siding scale by zip code, though, even if that would make sense.
Agreed. People just get on the mortgage deduction tread mill. The other thing that should definitely be gotten rid of is mortgage deduction on 2nd homes. It’ll hurt that market, so maybe it needs to be phased out over time, but it’s absurd to give people a tax break from owning 2 homes.
I used to work with “middle class” people in the Bay Area. They lived in the boonies - North or South or West - or somewhere like Milpitas or Sunnyvale.
Real estate was still expensive. But even during the mortgage madness, I didn’t know anyone with a middle class income and a $500k mortgage in the Bay or the Valley.
Sunnyvale is right in the middle of Santa Clara County. Hardly the boonies. Try finding a home in Sunnyvale for < $500k. Good luck! A condo maybe, but not many houses.