I was originally going to label this the “Dumbest. Idea. Evar.”
And then I had to ask myself: What if it’s not so dumb?
Edward Glaeser warms my wonky heart by clearly explaining the problems with the mortgage deduction.
Problem one, he says, is that “the size of the tax benefit is proportional to your debt.” As such, “the deduction essentially encourages us to make leveraged bets on the swings of the housing market.” The last few years haven’t just been a gamble on housing. They’ve been a government subsidized gamble on housing, which has made the gamble bigger.
I freely admit to not being a wonk. I’m one of those hundreds of millions of Americans who bought a house, continues to pay my mortgage on time – in an exceptionally high cost area – and has no intention of walking away from an obligation I made in good faith. Knowing, as my parents’ generation taught us, that home ownership was the principal path towards middle class wealth generation. That home is – generally – the best investment the average schmoe can make. It’s a chance to have a slice of the American dream, take a little out to send your kids to college, and maybe leave a bit behind when you walk into the clearing at the end of the path. When you’ve paid it off free and clear it’s your very own. No landlords to pay wrack rates to. No permanent ruling class.
Because you’ve got to live somewhere, housing prices compete favorably with other forms of investment over the long term, and renting means paying somebody else’s mortgage for them.
We moved here because that was where we were sent, chose a neighborhood based on the best public school district in the region and paid the market rate on a house we thought we could afford, that would fit the five of us.
Part of that calculation included a reckoning of the tax advantages to home ownership: If renting cost n dollars, and owning cost n+x, a substantial portion of x could be deducted from the overall ownership, if not all of it. All that before calculating the equity stake that comes with generally rising home prices, and declining obligations – absent a speculative bubble. And bubbles come and go.
If there’s no tax advantage to participating in the dream, many more folks might choose to rent rather than own. In an economy that is suffering because housing values are worth less than the debt obligated, many millions more would choose to walk away. The financial crisis generated by trillions of un-anchored debt will multiply manifold times. Wealth will aggregate in the pockets of those who are already wealthy, and the rest of us will leave nothing much behind us when we leave than cost of cleaning the flat they find our corpses in.
Which will leave our children as perfect wards of an all-powerful, beneficent state. A state that knows what’s best for you. A state that makes your choices for you. A state that will take from those, according to their ability, in order to provide to those, according to their need.
Maybe it’s not so dumb after all.
Maybe it’s merely evil.
But what do I know? I’m not a policy wonk. I’m just a guy making the best choices I can for my family.
So how much of a tax deduction do Americans get?
There be no tax deduction for owning a home here, unless you’re self-employed and use a piece of your home as an office, in which case you can deduct the appropriate percentage of the interest portion of your mortgage payments. But that’s it.
I did my taxes this weekend. I was shocked at how much I gave the government! Then I looked at how much interest I paid on my mortgage 5 figures on both. At least I got to deduct the interest on my house. Being single with no dependents stinks.
Speaking as someone who is old enough [80] to own a paid-off house, it’s a wonderful thing to have, in lean times. And if, in addition, you live in a state which has no state tax to add to your federal tax burden, it’s even better.
I don’t know how long this recession is going to last, but having lived through five or six of the damn things including the tail end of the Great Depression, I know they usually last about two years if not less. That is, unless malign socialists use the recession as an excuse to extend government control over many more citizen activities, which our new administration appears to be determined to do.
This recession is in no way as desperate as the Great Depression, in spite of what the mainstream press and the present administration is trying to make you believe. The best way to get through this with most of your money and belongings intact is to be careful about spending on non-essentials, and be careful about selling things like stocks which were sound and conservative a year ago. If you don’t sell them now, they will recover. The surest way to lose money on them is to sell them in a down market.
When I entered Radcliffe College in 1946, it was an expensive school, but my parents wanted me to have a first-rate education. So they scratched around and found the money, and my mother made about half my clothes for the great adventure. In addition, I joined a crew of scholarship folks from Harvard and we worked as waiters and waitresses on weekends. It was an adventure and I enjoyed it, even though I got stalked so determinedly that I had to shift to Columbia/Barnard for my last two years [which I didn't like nearly as well scholastically, but I got my degree and it has served me well all my life] bless it.
You gentlemen and ladies out there who have children soon to go off to college, let me assure you that they are smarter and more innovative than you, as devoted parents think they are. They will survive, and thrive, even if they aren’t situated at the great wonderful college you hoped they would have.
Education, worthy education, comes from the damnedest places sometimes. And with superior parents, like you all are, they have a huge head start toward learning excellence.
Be of good cheer, friends. We will survive and thrive yet….
Marianne
Actually it is not such a bad idea. I did the math several times when doing my taxes, and except for the tax deduction owning a home has nothing really to suggest it for me. With the same money I could be in an apartment just fine-and I could leave when the lease was up with out all the heartburn of worrying about renting out the house.
Now mind you I’m not advocating changing the law-just pointing out that fact that houses got too expensive. For what you pay in CA you could live on the river here-with a boat dock. There is just no sense in that what so ever.
I paid off my house in 25 years. Took the interest deduction every year. Got one for the property tax too. (I’m afraid to calculate how many times over I’ve paid for my house figureing interest and taxes during those 25 years)
For a long time then I thought that I’d gladly trade in my mortgage interest deduction for tax free interest on savings and/or dividends. I could have “saved up” faster and maybe the interest on the mortgage would have been a little less too as there would have been a bigger pool of money sitting about. But, what do I know being only a lowly subject.
Vmaximus; I too have been single all my life. It wasn’t all dumb luck as I always managed to remember my Grandfather’s advice: Before you buy the calf, look over the mama cow. Also, and this is Italian peasant wisedom, never accept a gift that eats. In that vein, a Vmax motorcycle is a passible substitute as it is fun to ride and it can kill you if you don’t handle it just right. On the general “up-side”, you don’t have to feed it when you aren’t riding it. (that didn’t come out quite the way I meant). I’m a Harley man myself.
So Lex,
Any properties available in your neck of the woods? I have my sister, her husband the prof and their 3 sprogs coming to spend a year here starting in August while he is “working” at the Uni. They really want their 3 sprogs to attend your daughters school and are used to spending the odd year living off Carmel Valley or Del Mar Heights.
I’ve told them that all the For Sale and For Rent signs in the various neighborhoods roundabouts have had the reefs shaken out and no longer exist since it appears to be full ahead in that particular housing bubble. They are a bit disconcerted but plan to spend the month of July in Berkeley pulsing the UC base before heading down for the academic year.
Seriously, if there is anything in your neighborhood….That is if you are in the catchment for TPHS…
Just more “It’s so unfair that people who have more money have more money!”
“New research” shows the higher the mortgage, the bigger the tax advantage. Someone really needed to research that? The people who have the bigger mortgages probably have bigger house payments, too. We’d better research that one. Perhaps they even spent more time in school and got a higher paying job to support said mortgage payment. How unfair of them to do that.
It’s *so* unfair that anyone who has a mortgage payment gets a deduction because renters don’t get a deduction. Class warfare at its finest. Perhaps landlords should share their deductions with their tenants. Oh, wait. In many places, they already do. It’s called rent control.
“Problem five is that the deduction doesn’t even carry out its stated purpose of encouraging home ownership among those who couldn’t otherwise afford it. The deduction is only available to those who itemize their taxes.” A patently specious statement, which doesn’t even rise to the level of argument. For most new homeowners, the mortgage is THE way they are able to start itemizing their taxes, because so many other deductions are subject to a 2% of AGI limitation. This guy cannot possibly do his own taxes.
Sure, get rid of the mortgage deduction…but slash the tax rates first, or go to an 8% flat tax. Of course, any change is going to be “unfair” to someone.
Following on BlameitonRio just remember any attempt to make taxes more “simple” is going to make them more “unfair”; while attempts to make the code “fair” necessarily means a more complex one. The Code CANNOT be both “Fair” and “Simple” simultaneously if one’s definition of “fair” is a code which takes into account all different circumstances like, say, different depreciation schedules as between race horses and drop-forges.
OTH, if one’s definition of “fair” means all are subject to the same ratio of taxes, than a Flat Tax can be considered as “fair” whereas under the current popular thinking it is considered by some to be “unfair” in that while applied evenly, it produces uneven outcomes.
End of tutorial.
(BTW, Lex, PLEASE restore numbering system if poss. or is it by-by for good?)
I’ll try to get it back up, but earlier in the week, after I installed the “reply to” feature in comments and added a plug-in that was designed to put numbers back on the posts, it also installed a new style sheet that made comment fonts minuscule. Took me no small amount of time to unfark it.
VX- Don’t we already have uneven outcomes without the flat tax in that 5% of the people are paying 60% and in California 1% pay 48% of the total? (highest of any state I believe). While I appreciated my mortgage deduction I am a proponent of the flat tax and I wonder if it didn’t promote some bad behavior. The code has become too complex and politicized.
Then again-I’m no tax wonk either.
So you can deduct all of the interest paid on your mortgages, I take it?
All in all, I’d rather be done with the 6% interest on the loan that eats up about 90% of my monthly mortgage payment (the 30 year loan is only five years old) that get the accompanying tax deduction. I might be wrong about this, but my perception is that the mortgage interest deduction is not a one-to-one reduction of your tax bill, rather it lowers your adjusted gross to a lower bracket in the tax table. If the former was the case, I’d probably owe nothing at all to the Feds.
Philosophically I am opposed to using the Tax Code to provide “incentive” for behavior. It’s just too damn convenient a way to slip all sorts of things into law that would never become so if the merits were debated. And the true “costs” of “benefits” are never really known so it turns into a prime method for special favors to be enacted into law. Before the Legislature lost any ability to be embarrassed and came out in the open (somewhat) on earmarks it was the favored way.
Home ownership may be a good thing for society. But so is saving for College. So every good thing isn’t deductible, even now. And while I can go on and on af the benefits of a “flat Tax” or the “Fair Tax” , etc. I believe the chances of any serious reform of our tax code will never happen under our present form of government. Oh in 20 years of so in the next cycle of the Democrats getting thrown out and some Republican will take a stab like Reagan but in the end it will just creep ever onward. To expect real reform requires a faith akin to believeing a hard-core heroin addict would decide on his own to put down the needle cold turkey while sitting on top of a 1000 lbs of Smack.
Wilko/OldT6Pilot:
Well, everything in life is a double-edged sword in my experience. The only problem with a flat-tax is that in order to get it politically one has to give up the deductions as was done in TEFERA of 82 when interest deductions for car loans, credit-card, etc, were done away with in exchange for lowering tax rates, leaving only the mortgage deduction while lowering amt medical deductions could accrue
as % of AGI from 5% to 2%. But of course the pressures for higher taxes that were present prior to TEFERA were not extinguished, so inevitably the rates crept back up–but the deductions were not reinstated to compensate. This is so because rate raises can be sold as across-the-board and thus “fair” to all, while deductions are cast as benefiting only evil “special interests.” Thus my main worry in giving up the mortgage deduction for the siren song of a flat-tax (which in and of itself is easily workable) is that in a few years pressures will inevitably mount to raise revenue and thus the tax-rate, but the mort. int. deduction won’t be reinstated because it will be seen as benefiting only the evil well-to-do. and thus cast as “unfair.” So we will end up with the same old high rates, only w.o. the mort deduction this time in the same way we lost auto and credit card deductions for good.
The fair tax? An almost impossibly tough sell politically despite the advantage of eliminating the IRS and eliminating making investment and/or business decisions based on their tax implications rather than upon their economical worth.
This is so because too many groups have an interest in the status quo.
1) Politicians hate it because it takes away their power to direct the economy (and reward contributors) via tax law, 2) the Treasury Dept (IRS, DEA, BATF) would fight it tooth and nail. People in IRS would all lose their jobs and DEA, BATF would lose the one tool they have–tax evasion and money laundering– to put Drug-dealers and white collar criminals away and, 3) cultural conservatives would oppose it as rewarding bad behavior/immorality (i.e., the idea that we don’t care how you made your $ as long as you spend it with us so we can tax it) and also 4) the left will claim tax is “regressive” and hurts the little guy most, so will demagogue it to death (never mind the “pre-bate” takes care of all that.)
The upshot? I weep for the future and plan on joining Max Damage as hired help on his farm in S. America.
re – “I’m not a policy wonk”
You’re a family wonk Lex, same as I. We made plans around the tax laws as they are and have been for our entire lives. We made long range plans.
Me? I live within my means, I buy what I can afford and live in <2000 sq ft house, albeit on the water…Now that they’ve stolen 1/3rd of my 401K to pay off the poor bankers and mortgage defaulters, the socialistic Democratic Party is gonna tax the hell outta me and mine because we fall into that group of upper 5% earners who pay 60% of the taxes collected in this country (ain’t that what you said yesterday?). Plus, and more painful, they are gonna pass along that debt to my kids- educated at my expense BTW, who are gonna have to pay it off someday, because they will most likely be productive, too. All “for change we can believe in”. Am I a loser, or what?
Nope. I ain’t gonna let it bother me. I’ll just buy another box o’ammo at Wal-Mart and start investing in gold.
Maybe more of us gotta start taking personal action like that 2nd LT maybe?
b2
Mortgage Interest Deductions and the American Dream …
You can check the link to Klein’s post, but for an uproarious diversion, see this one on the outing of Duncan Black as a homosexual, with funny pictures!
…
American Power tracked-back with, “Mortgage Interest Deductions and the American Dream”:
http://americanpowerblog.blogspot.com/2009/02/mortgage-interest-deductions-and.html
The worst is yet to come, I’m afraid. For small businesses (95% of all US businesses are considered ‘small’) the fit will hit the shan after they report their ’08 results. Banks are already pulling so-called ‘performing non-performing loans’. Never miss a payment, but the banks decides you’re a risky bet if you’re, say, in construction or long haul trucking, and pull your loan.
Add to that evaporating home equity and called lines of credit, also used by small business to stay afloat, and things get worse. You’ve fully drawn down your line in uncertain economic waters, but the bank says, “Your house is worth a lot less, your line has been reduced, pay up. With what?
Credit cards? Nope the credit card companies will pull about $2 trillion in credit in the next year as the five main players reduce their exposure, stimulus package notwithstanding. We receive a notice yesterday that Capital One card rates go to almost 30% if you miss two payments. Other companies are paying a cash bonus of $300 to card holders if they’ll pay off their account and close it. Huh???
Not a happy picture for an economy that runs on credit, exacerbated by the fact that Americans, on average save minus 0.5% a year.
And so I listened last night while trying not to gag everytime the Speaker smirked as I heard a lot of hot air that may have sounded good but its not like we haven’t heard it before.
Almost choked when the President said he had no interest in expanding Government. Its sad to me that so many fail to see the disconnect between his statements and the actions taken in just the last few days. One would hardly know we were in a war either as the only acknowledgment I heard was how we are going to save money by drawing down in IRAQ. No mention of sending 17,000 more troops to Afghanistan that he approved just last week – as if that is going to be free.
I’m all for positive encouragement from our leaders but this disconnect seems delusional at best.
So Virg the Tax discussion is academic in my opinion because nothing gonna happen on tax reform other than they are going up for people who work and produce.
Wonder if Max’s place can support all of us?
Great analysis Lex, which goes hand in ahnd with my belief tht by giving the money directly to the banks to loan back out is a folly in itself.
Instead if the government really want to revive the economy by giving the citizenry more money to spend, giving it to the banks to loan out with interest upon payment is not the way to go – rather the government should be giving the money directly to homeowners being affected by reducing home values to pay off their mortgages, thus freeing up a couple thousand dollars a month for homeowners to spend on the economy.
By dispursing the money in this manner, the banks reduce their obligations and homeowners gain disposable income, and as commentor Marianne Matthews notes: Having a home mortgage free is a good thing to have during a recession.
Michelle – you are correct. We get to deduct the interest on our mortgage loans. Now, like daveg said, it is not a one-to-one reduction in tax owed (ie – a tax credit). It is a deduction – you lower your taxable income by that amount. Depending on your particular circumstances, it may drop you into a lower tax bracket – which is great.
For those that bought way more house than they could afford and had to get interest-only loans, they basically got to deduct their entire mortgage payment. Which was a pretty sweet perk until interest rates went up – since most interest-only loans were based on the LIBOR and reset every six months. Then their payments got so big that their mortgage interest deduction pushed them into AMT territory. D’OH!
When you’ve paid it off free and clear it’s your very own.
I only wish. Right now my payment on principle and interest on my mortgage is about $700. My payment on property taxes is a little over $400. The way things are going, by the time I pay off the mortgage in 9 or so years I’ll have to pay the government over $7000 a year or else Cook County will send men with guns to throw me out of my home and sell it off to the highest bidder.
Tell me again who 0wns my house ….
Credit cards? Nope the credit card companies will pull about $2 trillion in credit in the next year as the five main players reduce their exposure, stimulus package notwithstanding.
I know someone who was living on a tight budget, but making it work–paying off debt by paying more than the minimum, not living beyond means, all bills paid on time, etc.
Then their biggest debt holder (credit card company BoA) QUADRUPLED the minimum payment and tipped them into bankruptcy. There had been no missed/late payments, and the bankruptcy attorney was stunned to see someone with such a high credit rating declare bankruptcy. But they were eligible in every way; no question.
What a mess…
The irony is, forcing them into bankruptcy actually put them into a better financial situation in terms of monthly budgeting (they did NOT want to declare bankruptcy and hate the idea of not being able to pay off honorable debts… but they had no choice, thanks to BoA). Now they’re actually going to have a higher standard of living, thanks to the stupid bank that shot itself in the foot.
I think this deduction gets more focus by people than it should. Instead of paying off early, if able, they want the tax break. Exact numbers will vary, but I’d guess you’d be paying 3 times your tax break in interest to the bank, to keep that tax break.
Thanks, Schroedinger’s Cat.
Interest-only loans? Gee, imagine that… definitely a foriegn concept to me.
I’m surprised that you all in the Great White Up don’t have that too. So near, yet so far.
Consider yourselves lucky on that one. Scourge of the the housing industry those interest only loans. Brings greedy to a whole new level.
In addition to lowering your bracket, the deduction also lowers your adjusted (taxable) gross income. So if you’re paying $30k of mortgage interest a year, and you’re taxed at the 33% rate, there’s $10k or so of tax you didn’t have to pay. (It’s not usually repaid in the form of a refund, since we have the option to add deductions through our employer.)
That $833 per month that was not taken away in the form of tax was often the difference between renting someone else’s house (and paying down their mortgage) and making a payment on your own house while building equity.
Michelle-didn’t mean to ignore your question-just got back to a computer and you now have more complete information than I would have provided.
Lex-My eyes are getting bad. The text suddenly looks very, very small.
Yeah, I know. I’m working on it. Somehow, restoring the comment numeration schema is changing the font size of comments.
Argghhh!
Huh, all this interest only talk made me want to know more. Google is my friend and all that and guess what … apparently you can do interest only mortgages in Canada. Who would have thunk it?
I didn’t mean to imply that is was an insignificant amount of money. What I’m trying to reconcile is whether the tax benefits are higher than the 6% interest that I’m paying on the mortgage. It’s a perennial “discussion” with the wife and I’ve never been able to provide an irrefutable retort.
Of course, I’ve never been able to do that even when I do know the facts, so…