So you will be incentivizng homebuyers to take out sham mortgages.
Why is this any more compelling an incentive than investing your $10000 in basically anything else, or for that matter a 401(K) or IRA? And now people are most definitely taking out larger mortgages, you realize. You’re making it cheaper to borrow money, so people will borrow more money.
Well, since you put it in bold, I guess I will change my mind.
What else do you want him to do? A proposition like “1 + 1 = 2” can’t be simplified any further.
If every time I buy a loaf of bread the government mails me a check for the cost of the loaf of bread, I will probably buy more bread. Even if all I want to do with it is feed my chickens.
That’s not how deductions work.
No, they just give you PART of the cost of bread. You’re still gonna buy more bread.
Actually they don’t give you anything. You just pay a little less in taxes. You still pay more overall. If you spend a dollar here to save 30 cents there you’re still down 70 cents.
No I’m not, because the bread will go bad if I buy more bread. Our family never eats that much bread.
Let’s say that you come up with a budget and you decide you can afford a $1000/mo house payment. Mortgage Interest Tax Deduction X goes into effect which means that you will pay $600/yr less in taxes because of the new deduction. You can now afford $1050/month in house payments.
And it doesn’t stop there. Since you are now paying $1050/month, you get even MORE money back in taxes causing you to be able to afford $1065/month getting you even MORE back in taxes, etc.
Keep in mind that this extra money is only available to you if you purchase a home on credit. Otherwise there is no extra money. The result? People spend more money on home mortgages.
Obviously buying a mansion won’t be possible, but society as a whole goes deeper into mortgage debt.
This is getting ridiculous. You’re actually placing your argument on your family’s bread-buying habits. You do understand, I hope, that if bread got cheaper, SOMEONE would buy more of it, right? Maybe not you, but amongst the millions of consumers of food products, the lower price of bread would likely result in more bread consumption?
Look, you need to do some remedial reading here. Look up the concept of supply and demand, and then move on to the concept of elasticity of demand in order to understand how and why making something cheaper will increase demand for it.
The problem I’m seeing with the argument against is that they assume people will always choose higher debt for a term over lower debt for a shorter term. I don’t see this at all.
Let’s say I can spend 1000/mo on a mortgage payment due to my income. Right there that restricts the amount I can borrow in total for a house. The bank is not letting me take out a 1Million loan with that income. At the end of the year, let’s say I spent 12,000 on mortgage payments. I file taxes and get to keep 150 x 12=1800 of my income that would have otherwise been taxes.
Some people are saying that, somehow, my having this 1800 is bad for the economy. That I will simply buy more debt with it. I don’t see the necessity of this. Why couldn’t I pay off the loan early, or even spend it on something else?
Also, people are assuming that if I use that 1800 to pay off the principal that there will be an infinite regression of refunds. No. The first 12,000 gets a refund of 1800, then if I spend that 1800 the following year on mortgage I will get 1800 x 0.15 = 270. And so on.
I always think it’s kinda bizarre that my federal refund impacts my state taxes. I’ll have to read the explanation again this year and see if it makes sense to me.
You would fight it, but very few people would feel that big a bite, because not that many other people live in a house that costs $650k (which is how you save $3500/year in the top tax bracket with a 4.142% rate on a new home with 20% down.)
A married couple buying a house today won’t benefit from the mortgage interest deduction unless their house costs upward of $370,000. They’re only lowering their tax bill by pennies, and even that will dry up the next year as their interest payments drop.
But of course many people would still fight a change, either because they mistakenly think they benefit, or they think they benefit much more than they actually do because they fail to consider the difference between their itemized deduction and the standard deduction ($12,200 for married couples.)
I would like to hear more about this.
CPA here. I think you are confused. Your federal income tax refund is not taxable for either federal or for any state income tax purposes.
What you may be thinking of is a state income tax refund. State refunds MIGHT be taxable for federal income tax purposes for the year received (but will not be taxed at the state level, of course). State refunds are taxable for federal purposes only if you itemized your deductions in the year attributable to generating the state refund and you deducted state income taxes as a deduction on Schedule A. Even then, the refund may not be taxable if you fall into a few other scenarios, such as having been subject to the AMT tax for that year or if there were unused tax credits for the year.
The rationale behind having the state refund being taxable in certain situations is that it is taxable only when you received a tax benefit from deducting the state taxes in an earlier year.
Yep that’s what it is. The state refund changes the federal tax. Annoying.
That’s because you are approaching the problem from the perspective of an individual, rather than looking at the market as a whole.
You cannot take your own mentality and extrapolate it out to everyone else. You cannot assume that the entire market will act the same way that you would act. That’s why comments like this are so silly:
Nobody cares how much bread your family eats. Other families are different.
Your family’s bread eating habits are not a reliable indicator for everyone else. Your family’s debt tolerance is not a reliable indicator for everyone else. The mechanics for the bread market is a bit different from the debt market, but the end result is the same. If debt is subsidized, then (all else equal) there will be more debt. This is true regardless of your personal behavior. Other people are not the same as you.
You personally could pay off the loan early. You personally could spend it on something else.
But the market as a whole will act much differently. Even if you believe that many many people are like you, the market will still act differently. (For a rather interesting reason, actually.)
Your post is a red herring. An eloquent and condescending red herring, but still a red herring. Why? Because you have have not really addressed the discussion, but instead have decided to portray my position as mere subjective projection onto “the market”.
Address these two issues without begging the question (that would be a new development):
-why does an individual (probably) opt for longer term and higher debt over shorter term and less debt? I outlined a tax situation of an individual, a fairly reasonable individual, who chose not to get a bigger mortgage and instead chose to pay off his debt early, perhaps saving more for retirement in the process. What’s wrong with this person that he doesn’t obey “the market”?
-how much of a difference is there between these two debts given the deduction as I have presented it here? Go ahead and show how much more debt the person who obeys “the market” accumulates due to the deduction. I’m interested in seeing just how much more debt “the market” accumulates.
Every person’s attitude toward debt is ultimately subjective.
Your fault lies in assuming that other people will act exactly like you. They won’t.
People opt for more debt, because it’s subsidized.
I realize that this answer is not clear to you. I realize that. But it’s still the truth. It’s not begging the question. It’s the answer to your question. The answer is no good to you if you don’t understand it, and I realize that, too. But it’s still the right answer.
I also explained why you’re not seeing it as the right answer. It’s because you’re taking your own personal viewpoint, and extrapolating it out to everybody else incorrectly. You can’t do that. Other people are not like you. If you want to understand why subsidized debt will create more debt, then you need to stop using your own reasoning and start understanding the reasoning of people who are not like you. This is a very difficult thing to do. I’m not intending to be “condescending” when I say that. It’s the plain truth.
This will take time to explain. It will be easier for you if you listen more and complain less.
Yes, you did.
You are very right that this is a reasonable individual. My parents are exactly like this. They would not buy a more expensive home, even with more subsidies for borrowing. They would pay off their debt more quickly. But other people are not like my parents. You can’t use the behavior of my parents to examine everyone else. Other people are different.
And now you are misrepresenting what I said.
I didn’t say anything at all about “obeying” the market. Don’t make stuff up. People will justifiably condescend to you if you do that.
There is nothing about “obeying” the market anywhere in my post.
The market is not a thing to be obeyed. It’s just a bunch of people. That’s all it is. They are not sacrificing lambs to an abstract god of capitalism. When I use the word “market”, I’m talking about the behavior of a bunch of people. Some of them are like my parents. Some of them aren’t. My parents would use a mortgage deduction to pay down debt, but other people are not like my parents. When I’m thinking about the market – which means I’m thinking about everybody and not just my parents – then I need to account for the behavior of people who are not like my parents.
Are you ready?
To think about how [del]the market[/del] the big group of people will respond to a mortgage deduction, we have to think about what they want. Very important. This big group of people includes my parents, yes, and it includes people like my parents. But it also includes bankers, and it also includes speculators, and it also includes people who are not yet homeowners but might become homeowners if it becomes easier to become a homeowner. All of these folks belong to the ma-- to the big group of people.
Start with bankers. Bankers love debt. Bankers live off of debt. When my parents take out a loan to buy a house, the bankers earn interest on that loan. And when my parents get a mortgage deduction, and subsequently pay off their loan more quickly, then the bankers receive jack shit after the loan is repaid. Bankers don’t earn any interest after my parents repay the loan. Do you understand that? Bankers can only charge interest on loans that haven’t yet been paid back. So when one loan is paid off, what do the bankers do? They’re not earning any interest until they make a new loan. So what happens?
The people who are like my parents pay off their loans. And then the bankers, in order to stay in business, start lending to other groups of people. These are people who are not like my parents. Some of these people can now afford to buy a home because of the interest deduction. Some of these people can now afford to buy a bigger home, and take out bigger loans. Some of these people can now engage in more speculation because it’s more profitable with an interest deduction. People like my parents will pay down debt, but bankers have every incentive to make a new loan for every one that’s paid off, and in addition they have a further incentive to extend new loans to other people who are not like my parents and wish to take advantage of lower rates to do more lending. Every time a person like my parents pays off a loan, the banker will be looking for a replacement. And (if we’re not experiencing a huge financial crisis) they will find a replacement, because if they don’t make a new loan, then they will lose those interest payments.
This is why it’s a mistake to take a personal with a reasonable attitude, like the attitude of my parents, and assume that everybody else acts the same way. As I said: “You cannot take your own mentality and extrapolate it out to everyone else.”
I hope that explanation is more clear.