Outside the Beltway

Outside the Beltway

Mortgage Interest Deduction

Steve Verdon
15

The President’s Advisory Panel on Federal Tax Reform is suggesting reductions in the mortgage interest deduction for some homeowners.

But earlier this month, President Bush’s Advisory Panel on Federal Tax Reform made recommendations, to eliminate this deduction for persons paying interest on larger mortgages, possibly those exceeding $250,000 to $350,000. At the Panel’s final meeting on October 17 the limit was set at $313,000, the current maximum limit for Federal Housing Administration loan guarantees, an FHA amount that varies by location. The panel has also recommended the elimination of the deduction for residential property taxes.–emphasis in the original

Now my reading of this paragraph leaves me really cold to this idea and is one more reason why Bush is just doing a rotten job on the domestic front. I live in California, and not in an expensive neighborhood along the coast such as Laguna Nigel, Orange County. And with the recent run up in housing prices even buying my current house with 20% down would put me into the lower end of the range being considered for capping mortgage interest deductions, and we aren’t talking a big house either or even a new house. So this kind of thing, without some sort of area adjustment accounting for differences in the cost of living would be ridiculously unfair.

Moreover, the reasons for this kind of tax hike (apparently renegging on promises not to raise taxes seems to be a problem with the Bush family) are pathetic.

  1. Limiting the deduction would provide much needed revenue to the U.S. Treasury to help meet the growing deficit caused by other tax cuts, the war in Iraq, and the looming costs of recovery from the Gulf hurricanes.
  2. The current mortgage interest deduction encourages people take on added debt, sometimes only in order to spend more on consumption such as enabled by home equity loans.
  3. The deduction discriminates against renters and even against those with lower rates of mortgage indebtedness; and, as currently structured, it is merely another tax benefit fully available only to those with the means necessary to buy a home requiring a $1 million mortgage.
  4. Such a change would allow the government a mechanism to slow down a runaway situation which is pricing millions out of the housing market. This argument holds that the only other mechanism currently available, raising short term interest rates, has failed to stop or even slow down rising house prices.

Taking each one in order my responses would be,

  1. The deficit while not completely the result of President Bush’s spending it sure is a big component. Scrapping Bush’s prescription drug for the elderly blackhole would also be a sensible place to address concerns about the deficit.
  2. There might be good reasons people are using home equity loans to maintain consumption levels. This kind of reason is arrogant and presumptuous.
  3. This just an outright lie if the caps apply to people with mortgages of $250,000 or more. Of course, that paragraph isn’t clear whether the $250,000 refers to the size of the mortgage or the interest deduction.
  4. The mortgage deduction has been around for quite some time, it is unlikely that the current run up in housing prices is due to the deduction, but is instead a function of the historically low interest rates, and as such is completely misleading.

Further, this kind of a policy change would likely have a big impact on the contruction industry and its ancillary industries.

Hopefully President Bush wont agree to such a recommendation and will somehow find the spine to resist spending. I didn’t realize that almost one year ago I was voting for the big government, big spending, liberal candidate. Guess I was wrong. Next election…I’m voting for Lyndon LaRouche, at least I’ll know what I’m voting for.

Update: I’m also going to try and nail down whether that $250,000 applies to the mortgage or the interest payments.

Update II: Okay, the $250,000 figure refers to the size of the mortgage. With such a lower floor, if it applied in California, you’d find that modest houses in some areas would no longer get the full mortgage interest deduction.

Further, this part of the proposal is actually anti-savings, IMO. Many people look at their house as a major asset when they retire. By removing the mortgage interest deduction it makes home ownership look less desirable than it currently is. Hence less home ownership, and for savings to remain the same we’d have to assume that people would take up the difference with increased personal savings/retirement. I think that is a bit overly optimistic.

Also, there are other things that really don’t do much for many people. For example, the ability to pay for health insurance with pre-tax dollars. Big deal, I already get that with my current employer. Nothing there for me. Overall this is about as impressive as a bucket of spit.

Update III: I’d also like to point to Arnold Kling’s article on Bleeding-Heart Libertarianism.

The conventional wisdom is that the intent of the Welfare State is to reduce the disparity between the unfortunate and the well-off. The Welfare State supposedly redistributes income and reduces poverty. In fact, I believe that the Welfare State redistributes poverty and reduces income.–emphasis in the original

Which the current reform proposals will continue. Lets face it, for government perpetuating poverty and misery is what keeps them in their jobs. Very, very rare is the government agency that actually fixes a problem and then close up shop and zero out their budget.

Related Posts: Tax Overhaul Commission Reports

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15 responses to “Mortgage Interest Deduction”

  1. RA Avatar
    RA

    This commission is acting like it was driven by the socialist Democrats. I agree with your points. Also I object to having to pay federal taxes on monies that I have no say as to how they are spent. Paying property taxes to the county is not an option. They get theirs first. Then to have to pay federal tax on these monies I never see is double taxation.

    Its time to cut the budget 15 % across the board.

  2. Barry Avatar
    Barry

    Steve:

    “I live in California, and not in an expensive neighborhood along the coast such as Laguna Nigel, Orange County. And with the recent run up in housing prices even buying my current house with 20% down would put me into the lower end of the range being considered for capping mortgage interest deductions, and we aren’t talking a big house either or even a new house. So this kind of thing, without some sort of area adjustment accounting for differences in the cost of living would be ridiculously unfair.”

    In Slate, Daniel Gross suggests that the ‘tax reform’ proposals deliberately target blue-state residents. Perhaps you should move to a red state.

    “Moreover, the reasons for this kind of tax hike (apparently renegging on promises not to raise taxes seems to be a problem with the Bush family) are pathetic.”

    After years of skyrocketing deficits, started by massive tax cuts skewed towards the rich, you’re now surprised that you are going to be hit by as much of the bill as the GOP can manage? Do you remember the 1980’s? Bush clearly does, and that Reagan handed the mess over to Bush I and Clinton.

  3. Steven Plunk Avatar
    Steven Plunk

    Why do people still point to tax cuts as the problem? History has shown those cuts have resulted in enhanced revenue collections. The problem is uncontrolled spending.

    We should also keep in mind that these proposals are for the consideration of congress and the president, they are not nearly the final word.

    Tax reform ideas all make the mistake of disrupting a system that has taken years to evolve. Tax reform should gradually be implemented over, perhaps, a ten year span to allow adjustments by the taxpayers.

    I would also recommend not overhauling a tax system when war time spending is taking place. This spending level skews the numbers and confuses the issues.

    At this time it is clearly best to do nothing on the revenue side and prioritize spending. Minus the pork of course.

  4. alhjfk Avatar
    alhjfk

    I didn’t realize that almost one year ago I was voting for the big government, big spending, liberal candidate.

    Actually if Bush accepts this recommendation he will be acting more in line with conservative, neo-classic econonmics. The biggest receivers of welfare in this country are middle class homeowners given the current tax structure. The housing sector is one of the most-dominated by big government dictates.

    And with the recent run up in housing prices even buying my current house with 20% down would put me into the lower end of the range being considered for capping mortgage interest deductions, and we aren’t talking a big house either or even a new house. So this kind of thing, without some sort of area adjustment accounting for differences in the cost of living would be ridiculously unfair.

    Sorry to hear you weep–welfare queen. Go tell your story to other fellow liberals like Ted Kennedy.

    Luckily for freeloaders like yourself, Steve, the swing suburban voters who benefit most from these government handouts are more likely to vote Republican; thus, any action on the part of Congress to cut this subsidy is unlikely.

  5. Boyd Avatar
    Boyd

    I’ve got a few problems here, Steve. First and foremost, neither you nor the Mortgage News Daily site to which you point mention that one of the directives given to the Tax Reform panel is that any changes must be revenue-neutral. Yes, there would be winners and losers in any change, but the overall revenue must remain the same under their charter.

    Which isn’t to say that any particular change might be ill-advised, but the whole tone of your post (and the original article where you got your information) completely ignores the point that the effort is designed to simplify the tax system without taxing America, as a whole, any more than it already is.

    And this gives the lie to the first reason that you somehow ascribe to the Bush Administration (without substantiating it, I must point out) that such a change would enhance the government’s revenue. If they’ve done their job, that’s completely false. If they haven’t done their job, you’re talking about the wrong subject.

    And let’s go back to your point that these rationales come from some mysterious person “in the Bush family” (I wonder who that might be?). How do you know they are the Administration’s reasons for these changes? You don’t tell us your source, although clicking on the link in the first paragraph shows us that you got it from the MND post. They don’t provide any source, either. Without that, it’s all made-up tripe. You’re putting words in the Administration’s collective mouth, which falls somewhere short of intellectual honesty in my book.

    It’s a sad day when the AP can put out a more balanced and fact-based article than your post on the same subject, Steve.

    Of course, if you can substantiate some (or any) of your points, I’ll happily withdraw my objections. I just maintain that you should have provided that substantiation initially instead of weaving us a story with no apparent foundation.

  6. DL Avatar
    DL

    I thought Bush was talking about the “ownership economy?” How will new homes be purchased without this incentive?

    Isn’t this just more net taxation by deceit?
    Revenue enhancement by another name is still taxes!

  7. Steve Verdon Avatar
    Steve Verdon

    Actually if Bush accepts this recommendation he will be acting more in line with conservative, neo-classic econonmics. The biggest receivers of welfare….

    Skroink…I think we now need a new definition of welfare: When the government lets you keep more of your money.

    I’ve got a few problems here, Steve. First and foremost, neither you nor the Mortgage News Daily site to which you point mention that one of the directives given to the Tax Reform panel is that any changes must be revenue-neutral. Yes, there would be winners and losers in any change, but the overall revenue must remain the same under their charter.

    Well Boyd that is probably because the title of this post was Mortgage Interest Deductions, not All of the Tax Reform Panel’s Suggestions.

    Which isn’t to say that any particular change might be ill-advised, but the whole tone of your post (and the original article where you got your information) completely ignores the point that the effort is designed to simplify the tax system without taxing America, as a whole, any more than it already is.

    Which when we get right down to it is just a lie from Bush and his Administration. Very rare is it when a politician actually wants to simplify the tax code. All those tax attorneys and accountants would suffer for it. We could simplify the tax code and do away with mortgage interest deductions without increasing the burden of most people. Of course, there is little interest in doing that.

    And let’s go back to your point that these rationales come from some mysterious person “in the Bush family” (I wonder who that might be?).

    Come on Boyd you aren’t this dense…but maybe you are this partisan. My comment about the Bush family was in reference to George H. W. Bush’s lie about not raising taxes.

    Of course, if you can substantiate some (or any) of your points, I’ll happily withdraw my objections.

    Given your partisan bias I doubt it.

  8. Boyd Avatar
    Boyd

    Given your inability to consider ill-advised statements and presenting as fact things that have sprung into your mind (or those of MND) from nowhere, I didn’t think you’d bother to substantiate your claims.

    This is borne out by your retreat into the closet of, “He disagrees with me! It must be partisan bias!” Again, you don’t bother to learn any information, you just respond with your own knee-jerk reaction.

    You still don’t bother to tell us where you got the idea that the reasons you presented came from the Bush Administration. And why? Because you can’t. Why? Because they didn’t come from the Bush Administration. Someone made them up, attributed them to the Bush Administration, and you “quote” them blindly.

    And yes, I knew exactly what you were talking about with your reference to the Bush family. It’s a shame you can’t recognize irony when you read it.

    I’m not trying to pick a fight with you, Steve, be it partisan or non-partisan. I’m calling you on your failure to put any effort into a post that slings accusations. You give the appearance that you’ve done nothing but rely on an industry-supported web site for all your “facts.”

    And taking the first point last, by pointing out that the Mortgage Interest Deduction proposals are part of a larger package, I’m trying to provide context to the situation.

    It’s no surprise that carving out the Mortgage changes from the rest of the recommendations would sound stupid. Doing so is a cheap shot, because the Commission wouldn’t propose doing them alone. Their mandate is to remain revenue-neutral, so what’s taken away from the taxpayer in the mortgage area must be given back somewhere else. You’re only telling half (or less) of the story.

    It must be nice knowing you can go through life with hardly any effort and still know that you’re always right.

  9. McGehee Avatar
    McGehee

    How will new homes be purchased without this incentive?

    By taking out a mortgage and making payments. Just like many people did before there ever was a mortgage interest deduction.

  10. Steve Verdon Avatar
    Steve Verdon

    Boyd,

    I never said the reasons in favor of removing the mortgage deduction were the administrations. That was your knee jerk reaction. As for your irony, maybe you can try writing a bit better so it is easier to spot.

    Finally, the problem is that while the proposal might be revenue neutral and in their examples they show most people getting larger or minor reductions, this conclusion depends largely on the underlying assumptions which are not, AFAIK, present in the final report (caveat I haven’t read through the appendix yet). By the way, have you read the final report at all?

    For example, an example that has a mortgage deduction of x might be valid for say Nebraska or Ohio, but might not apply to somebody in San Francisco or Los Angeles even though the incomes are the same. This would violate the notion of vertical equity where people with the same income are treated the same for tax purposes.

    Also, the examples have assumption for charitable giving, I don’t know if those numbers are reasonable or not. Are they an average, the median, or what? Were they picked to produce decreases in taxes paid for people with certain incomes or not?

    So while the overall proposal might be revenue neutral there could still be people who are clearly middle class who get screwed over by these proposals simply because of where they live.

    It must be nice knowing you can go through life with hardly any effort and still know that you’re always right.

    Right back at ya Boyd. You are putting quite a bit on the idea of “revenue neutral”. Revenue neutral can still be worse, better, or no different than the current system. Over all, I don’t see much of an improvement with these reforms.

  11. Boyd Avatar
    Boyd

    Steve, when you said:

    Moreover, the reasons for this kind of tax hike (apparently renegging on promises not to raise taxes seems to be a problem with the Bush family) are pathetic.

    …and then proceed to list reasons in support of these changes, were you trying to mislead us into believing they came from the Bush Administration, or are you trying to mislead us now?

    Why don’t you want to attribute that list to its originator? What are you trying to hide? Who made up this list of pathetic reasons? If it was created by an opponent of the package, it’s a strawman, the result of (at least) intellectual dishonesty. If the list was originally offered by a proponent of these changes, who was it? Again, why don’t you want to tell us where they came from?

    And please forgive my lousy writing skills, Steve. I know I didn’t make it clear that I don’t necessarily disagree with any of your individual points per se. I was trying to point out that you’re slinging mud, not providing sources for information you try to imply come from the government, and cherry-picking parts of the Commission’s report to say how awful it is. That’s disingenuous, at best.

    And you may well be right that the entire package, even if modified by Treasury and improved somewhat, may not provide enough benefit to justify upsetting the apple cart. That’s not the point of my calling you out on this post. You took a cheap shot at the report, presented parts of it out of context, and tried to mislead your readers into believing made-up rationale for the proposals. That’s what I’m objecting to.

  12. Steve Verdon Avatar
    Steve Verdon

    Geez Boyd are you usually this paranoid? Is it not the case that Bush I lied and raised taxes as President? That is what the parenthetical was pertaining too. It is not my problem that you are reading more into it than is actually there. As for the reasons, those were the one’s listed in the article. I found them unpersuasive and they are the best arguments that can be put forward, IMO, for this kind of a tax hike.

    As for slining mud at Bush, please spare me. Bush is the biggest spender to come along in the last 20+ years. He has expanded the size of government far more than Clinton ever did. That is not mud, those are facts.

    And I don’t think this is a cheap shot at Bush and his unbelievable spending. The man has turned the notion of conservative (as per Reagan) on its head. Gone is the idea of limiting spending. Gone is the idea of responsibility. In is the idea of spending like…well if I finished this sentence you’d call it an ad hominem (personally I’d call it a factual statement), and in is the idea of having the government take care of people.

    Finally you seemed to have missed this sentence.

    Hopefully President Bush wont agree to such a recommendation and will somehow find the spine to resist spending.

    I haven’t blamed Bush for this…yet. I am waiting to see if he is going to follow in his father’s footsteps and make himself out to be the liar all the Democrats and Liberals claim he is.

    Bush is an, IMO, and abject failure on the domestic front. This new commission simply underscores it, IMO. Now feel free to continue with the nitpicking if you like.

  13. Boyd Avatar
    Boyd

    Okay, Steve, I see that introspection isn’t your thing. If you don’t want to see how you tilted your post to lead people to believe something that isn’t true, no one can make you.

    We’ll just have to agree to disagree.

    Unless you don’t agree to that.

  14. Kent Avatar
    Kent

    Point of information: Has the Advisory Panel made any recommendation on whether the deduction should be grandfathered for existing mortgages?

  15. jason Avatar
    jason

    To the people that say the suggestions by the panel are for tax simplification I ask you how difficult is it to place your mortgage interest on form 1040 and do some simple subtraction? This is a tax revenue making sceme to the highest degree!

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