Sacred cows


We often hear people complaining about tax loopholes. Let’s talk about a big one – the home mortgage deduction.

Let’s say you and I are next-door neighbors living in identical 3brm suburban tract homes. I’m renting and you’re buying, but my rent payment is exactly the same as your monthly mortgage.

We have identical incomes, we’re both married and we both have 2.5 children.

You pay less in taxes because you get to deduct the interest on your mortgage.

Why?


About Myiq2xu - BA, JD, FJB

I was born and raised in a different country - America. I don't know what this place is.
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66 Responses to Sacred cows

  1. myiq2xu says:

    Don’t hold your breath waiting for those latte liberals to give up that one.

  2. Mimi says:

    The tax code has been used to encourage various policies forever. It is a form of social engineering. Mortgage interest deductions was to encourage home ownership, decent housing, blah, blah, blah. The same could be said for business interest deduction, farm interest deduction, etc. It starts out modestly with good intentions and quickly gets warped into a subsidy for the wealthy.

  3. WMCB says:

    Well, the short answer to that one is always “because the govt wanted to encourage home ownership”.

    But years ago, with the disappearance of the “save up for an affordable house, and maybe finance 50- 80% of it, if any” America, I grew suspicious.

    I think the mortgage deduction is sacred to TBTB because it helped them blow the housing bubble, drive home prices up from our decades-long normal of 2 to 3 times income, and not have the sheeple notice it.

    The govt didn’t just want to encourage home ownership, their paymasters wanted to encourage vastly inflated and massively leveraged home ownership. The mortgage interest deduction helped them do that. The govt has done a lot of things to encourage the taking on of more and more debt by the people. It helps them hide a lot of really bad policy, if they can “help” the folks maintain the illusion of a lifestyle that isn’t even close to affordable anymore.

    • ralphb says:

      If not for fear of screwing up the housing market, they would have removed this deduction when they did credit card interest deductions in the ’80s. It was discussed during the debate on the Reagan and Dollar Bill Bradley tax simplification act.

      Remember that one, it made home offices harder to deduct while leaving in place the full deduction for second homes?

  4. votermom says:

    You think SS is a third rail, wait until someone tries to touch mortgage deductions.

    • crawdad says:

      Hence the “sacred cows”

      • votermom says:

        As a mortgage payer, I’d be right there with my pitchfork too. 😀

        • WMCB says:

          Yes, but are you honest enough to say that you feel that way merely because it’s your ox being gored? Or if you have another reason, can you articulate why it’s good public policy, and fair?

          IOW, can you answer myiq’s question? Why should renters pay more?

        • votermom says:

          Homeowners pay a lot for upkeep of the property, which goes directly into the local economy, they pay property taxes, and they tend to stay put longer and therefore become more involved in the community.
          Renters tend to be transient, and are less likely to invest effort into improving an area that is not theirs. They don’t care as much. You own a place you tend to treat it as an extension of your identity.
          Owning a home = roots.
          (I say this as someone who has been a driftless renter for half her life.)

        • ralphb says:

          Traditionally renters didn’t pay more. That’s a recent phenomenon.

          The landlord takes the mortgage deduction off his taxes.

        • catarina says:

          The mortgage deduction sure helps when it’s time to pay the tax man/drunken sailors.
          It’s what we call a “clawback” at my house.

          MA has a small deduction for renters but doesn’t allow the mortgage deduction.
          It’s a pittance, though-I don’t think it’s been adjusted since the 80’s and doesn’t come close to reflecting going rents.

          What if everyone got some sort of housing deduction? How about making it “fair” instead of giving government more money to blow?

        • Lola-at-Large says:

          Maybe if they got a renters’ deduction, they would take better care of a place? And stay longer?

          FTR, I do get to deduct a portion of my rent on my state taxes. I live in Indiana.

  5. votermom says:

    Let’s say you and I are next-door neighbors living in identical 3brm suburban tract homes. I’m renting and you’re buying, but my rent payment is exactly the same as your monthly mortgage.

    The answer here is that you should be renting a smaller place so you can save up to buy the house I own.
    That’s what we did, squeeze into a tiny apt while we saved up 20% for a downpayment.

    • Lola-at-Large says:

      What if I don’t want to own a home, and all the headaches that come with it? What if I want to protest the class system that property taxes prop up? Housing is required to survive. I think everyone should get a deduction for paying for a place to live.

      • ralphb says:

        The landlord gets the deduction. You should be paying less in rent because of it. If not, that’s a landlord problem more than a tax problem.

      • yttik says:

        You do get a deduction for a place to live. 5700 if you’re single and 11500 if you are married. It’s called the standard deduction.

        If you own a home you can take that standard deduction OR you can itemize and deduct what you actually paid in interest.

        Everybody gets a measly little deduction from the IRS to allegedly allow you to deduct your housing costs. It’s nearly impossible to put a roof over your head for 5700, but that’s what the IRS allows.

        • Lola-at-Large says:

          Good points. I was mostly paying devil’s advocate anyway, except I do believe the way that home ownership & taxes work in America does help maintain our current (screwed up) class system, due to the fact that property taxes and education funding are inextricably linked. Break that bind, and things might change.

          Also, I’m in favor of a variable flat tax. You make such and such, you pay this percentage in taxes, no deductions. You make x amount, your rate goes up to Y, no deductions, etc., for about 7 different levels. That’s about how many economic classes we have.

      • Erica says:

        Well, then, don’t buy a home. Let someone else own the property you live in and take responsibility for taxes, maintenance, improvements, etc. I agree with votermom. I didn’t buy my house until I was 40, and now I am fixing it up as I go. I’ve made an investment–not a financial one, but a social one, in this community/neighborhood. I am not as mobile as I was as a renter. I have more stake in making things better around here becuase I can’t just leave.

        Then there are the taxes I pay that renters don’t–I suppose you could call that a subsidy of sorts for renters–they directly benefit locally for improvements that homeowners pay for. As for the mortgage deduction, it is a godsend to me. In some way it stands for some values that are good: sticking around, putting down roots, getting to know your neighbors, building communities up. I have a bad feeling about dismantling it.

        • trixta says:

          Yes, Erica, were it not for the mortgage deduction many homeowners might not be able to maintain their homes (e.g. replace old roofs and windows, paint up-keep, repair sidewalks, plumbing and yard maintenance, etc.– all of which cost thousands of dollars) much less make other improvements. Then there is the high cost of property and flood insurance. All of these dollars get pumped back into the economy.

          Moreover, the property taxes (a municipal tax) homeowner pay go toward the educational system (students, teachers salaries, school construction, etc.)–yet I’ve never had nor will I ever have children in the system, so, one could argue, property owners without children should pay lower property taxes — or get some break on their income taxes for that. But we don’t.

          Bottom line, the mortgage exemption has made it possible for a substantial middle class to exist here in this country. Even some of the working poor own their own homes, but perhaps might not be able to were it not for a measly income tax deduction.

          Rather, I prefer to question why so many corporations pay no taxes at all, or why Wall Street has been able to pillage and bankrupt this country, or why we have an economy based on perpetual war….

          I think the middle and working classes have been attacked enough in this country.

      • catarina says:

        Lola, are you talking about actually allowing people some realistic cost of living adjustments for housing before Uncle Sam takes his piece of the pie and redistributes it?

        Hahaha, what a concept! 🙂

  6. WMCB says:

    Myiq, I like when you do stuff like this. 🙂 I think it’s good for us to play devil’s advocate, and have to examine and argue and try to justify things we take as a “given”, and a “normal”.

    Whichever side one comes down on, I think demanding supporting arguments is healthy in itself. We need more of that in this country. Whether the answer is “Yes” or “No”, never stop asking “Why? Why does that work? Would something else work better?”

  7. yttik says:

    “You pay less in taxes because you get to deduct the interest on your mortgage.”

    Only if you itemize! Likely you would only itemize because you have a slightly higher gross income, like a small business owner or somebody who is self employed. That renter usually just takes a standard deduction and in fact will often wind up paying less taxes then a homeowner claiming the mortgage interest deduction.

    The standard deduction for married filing jointly is 11,400. You can take that or you can take the mortgage interest deduction. Not both.

    If you get rid of the mortgage interest deduction, you’re looking at increasing a homeowner’s tax bill by thousands of dollars, depending on how much interest they pay over the year. That’s a large enough amount to put people on the street as they struggle to hang onto their homes right now.

    When you pay interest, that’s not equity, that’s just lost money that you’ll never see. It goes to a bank so they can profit. Why should you have to pay taxes on a bank’s profit?

  8. catarina says:

    If you get rid of the mortgage interest deduction, you’re looking at increasing a homeowner’s tax bill by thousands of dollars, depending on how much interest they pay over the year. That’s a large enough amount to put people on the street as they struggle to hang onto their homes right now.

    Amen.
    Middle class families rely on itemized deductions to keep their tax bills down.
    If the mortgage interest deduction goes away it will hurt a lot of people.

    The deduction for wealthier taxpayers with jumbo mortgages or multiple homes is already limited due to the Alt. Min. tax.

  9. Because I said so. There.

  10. ralphb says:

    Bill Clinton Book Coming in November

    Bill Clinton’s latest book, Back to Work, “will be released this November, and will offer solutions to some of America’s most pressing problems”.

    Clinton will provide “specific recommendations on how we can put people back to work, increase bank lending and corporate investment, double our exports, restore our manufacturing base, and create new businesses.”

    I may read this book.

    • votermom says:

      Chapter 1: Fire Obama

    • Now that is a book I will buy!

    • r u reddy says:

      Didn’t Clinton set the stage for some of America’s most pressing problems by getting NAFTA, WTO membership, and Most Favored Nation status for China passed and signed?

      How can we possibly bring back any of our production-held-hostage
      in foreign countries while we still have Free Trade? Or are we supposed to accept lower wages, higher pollution, and lower social standards than China, Bangla Desh, etc. have? (Which is exactly what Free Trade was supposed to cause here to begin with, by the way.)

      • 1539days says:

        The country that have restricted trade in the Eurozone are doing worse than the US right now. The China situation is a matter of degree. With better equivalence with the yuan and more effective tariffs, we could have a fair trade balance with China.

        • r u reddy says:

          I believe that WTO rules and our MFN for China both prevent doing the very things you suggest. The only way we could do those things is to withdraw from the WTO and cancel our MFN with China. Also, we would have to abrogate the NAFTA treaty to begin fixing all the economic wreckage that NAFTA was deliberately designed to cause.

          The only way a President could do all that were if he/she ran and got elected on a platform of doing exactly that by name and in detail.
          And if he/she got elected on a platform of doing exactly that, then he/she would have to explain to the country that if we do that . . . abolish Free Trade to force Fair Trade back into existence; the Free Trade elite governments all around the world will try to destroy our Fair Trade Government in the same way that the powers of Europe with some American assistance tried to overthrow the newly emergent Bolshevik Regime in russia; using modern post-violent methods of course.

          I would vote/work/etc. for such a Fair Trade versus Free Trade candidate, of course.

        • Three Wickets says:

          You mean Lenin’s Bolsheviks, or Putin’s..

        • r u reddy says:

          (Sub-reply to Three Wickets)

          Three Wickets, I mean Lenin’s Bolsheviks. The way the “capitalist west” felt about the infant Bolshevik government is the way the neo-globalonial elite would feel about a Forced Fair Trade government in America today. They would try to overthrow that government every possible way. We would have to expect it and be ready. If we ever force a Forced Fair Trade government into existence to begin with.

      • Dario says:

        While Bill Clinton was in office those policies were not a problem. The economy did just fine. Sometimes, policies don’t show their downside until years later. Why hasn’t Obama done anything about it? I forgot. He’s incompetent and not a leader.

  11. When all is said and done, these past few years we have taken the standard deduction. Itemizing- even with the mortgage interest, property taxes etc- did not add up. But then we live in a rural area where the price of property is not so outrageous- especially if you are willing to do some (ok a LOT) of fixing and updating as you go lol.
    Wonder how many homeowners actually take that mortgage interest deduction? We did the first few years- but as we paid it down- it no longer brought us over the standard deduction.

    • Dario says:

      Yup. It happens after many years that the interest is not enough. But if that’s true, your mortgage payment is lots less than the home would rent for.

      • ralphb says:

        The amount of principal goes up as the interest amount drops but the payment generally stays the same over the life of a mortgage, For fixed rate loans at least.

    • trixta says:

      Yes, ProudMilitaryMom. In such cases, homeowners take the standard deduction, but still have the privilege of paying property taxes — all of which go towards schools and upkeep for municipalities, etc. Homeowners — including those without children or who no longer have children of school age — pay for the public education of children whose parents are renters.

  12. Three Wickets says:

    Used to be part of the American dream, the deduction encouraged home ownership. It was a way to save money, hedge inflation, grow equity, avoid rentiers if you could pay off the house by retirement. But too much leveraging, too much of the subprime no-money-down scams and flipping, the GSE and TBTF securitizations, they all contributed to the housing bubble and bust. The other thing in theory about owning was that you were making a capital investment in the economy, putting your skin into it, you could lose it all like any other investment. And for taking that risk, you got deductions and you got to pay capital gains taxes instead of income taxes. But all that’s being re-debated now.

    Back to the mortgage interest deduction, the NYTimes seems to be saying the changes would only apply to higher income households, and even for them the new rules would still allow them to write off 80% of the MID they are used to writing off now. If I’m reading them correctly, could be wrong..

    Many wealthy Americans reap bigger gains from their tax deductions — of mortgage payments, charitable contributions and the like — than the middle class. Taxed at the top marginal rate of 35 percent, they get back 35 cents out of every dollar of authorized deductions. Middle-class filers, who pay a marginal rate of 28 percent, get only 28 cents back.

    The president’s proposal would cap the benefit at 28 percent for wealthy taxpayers, raising about $410 billion over 10 years, according to the White House. The idea tracks those proposed by Martin Feldstein, Glenn Hubbard and Greg Mankiw, top economic advisers to Presidents Ronald Reagan and George W. Bush.

    • catarina says:

      The NYT article doesn’t mention that taxpayers with high mortgage interest and other itemized deductions already get whacked with the “Alt. Min” tax.

      That’s sneaky.

      • catarina says:

        So-called “wealthy” taxpayers already have their mortgage interest deduction limited by the Alt. Min.

        It actually traps quite a few middle class taxpayers too.

        We really do need to reform the tax code. It’s screwed up, unfair, and provisions like the Alt Min don’t take inflation into account.

      • djmm says:

        These days, a lot of Americans who are not wealthy get hit with the Alternative Minimum Tax.

        djmm

  13. votermom says:

    OT. Sharp-eyed c4p reader noted that on Palin’s facebook page, all the family/kids pictures have just been replaced by campaign-type photos of Sarah.

    I’m hoping this means she is just waiting for this debate to get done before she announces.

    • catarina says:

      campaign-type pics, you say?

      🙂 🙂 🙂

    • Lola-at-Large says:

      I don’t think it’s going to happen that fast. She was just in the news yesterday suggesting a November launch. I think the release of Joe McGinniss’ book has pushed her plans back some. Funny thing, though, because Suskind’s book is beleaguering Obama far more than McGinniss’ book is screwing with Palin. Thank you, thank you, tank you Ron Suskind.

      • votermom says:

        Actually, it was Hannity that said “November”.

        • Lola-at-Large says:

          Rechecked that, and you are correct. He did bring it up, but she agreed that legally November was the deadline due to ballot-printing. I think she should wait as long as possible. I want her to break open the election cycle with her unconventional campaign.

  14. blip says:

    because when my toilet overflows or my roof leaks or the rats in my attic eat the air conditioning ductwork I can’t call the landlord and have him fix it for me for free?

  15. 1539days says:

    The statistics tend to show that the home mortgage interest deduction is used to upsell a homeowner into getting a bigger house. If they can afford payments on a $150,000 house, they may pay the same amount and get a $200,000 house with the deduction. This isn’t universal, of course, but it’s used for a purpose other than intended the higher you go on the income scale.

    If you own a home, the downside is that you are responsible for upkeep. The upside is that you have equity. A renter does not do the repairs, but the overall cost is part of the rent. If they leave, all the money goes with them.

    That’s why I think people who walk away from underwater mortgages aren’t getting away with anything. The banks think they can ride this out. When things pick up, they will own a bunch of homes they can sell again after getting mortgage payments the first time around.

    • r u reddy says:

      Another upside of ownership is that if you own, you can do what you damn please in and around the house, within limits. If you rent, the limits are much sharper and narrower.

  16. Three Wickets says:

    For any Eddie Vedder fans..

  17. Dario says:

    Let’s say you and I are next-door neighbors living in identical 3brm suburban tract homes. I’m renting and you’re buying, but my rent payment is exactly the same as your monthly mortgage.

    This scenario is seldom true for new homeowners. If it were true, most people would buy. Renting is cheaper. In addition to having to come up with thousands of dollars in down payment, most new homeowners pay more per month once one includes all the expenses, such as insurance, taxes and repairs. Roof and painting (all maintenance is not tax deductible) is thousands of dollars. The advantages to owning a home is that it’s true, the mortgage interest (not all the payment) to the bank is deductible, and because of inflation, over many years, the monthly payment will be less than what a renter pays.

    I agree that the interest on mortgage is a loophole, but it’s the only one available to the middle class. Owning a home is good for communities because most homeowners take care of the property. This is not a small consideration for cities because good neighborhoods attract businesses that pay more taxes, while blighted neighborhoods often attract more crime and demand more police.

  18. Dario says:

    I think there should be a limit to how much mortgage interest is deductible. Interest on $1 million mortgage should be plenty.

    • yttik says:

      I think it is already capped at a million.

      • Dario says:

        You are right. The cap happened when I wasn’t looking, but it appears that there’s another loophole when borrowing to make major renovations.

        Interest that you pay on your mortgage is tax deductible, within limits. If you’re married and filing jointly, you can deduct all your interest payments on a maximum of $1 million in mortgage debt secured by a first or second home. The maximums are halved for married taxpayers filing separately.

        snip

        If you take out a loan to make substantial home improvements, you can deduct the interest, with no dollar limit. However, the work must be a “capital improvement” rather than ordinary repairs.

  19. DandyTiger says:

    The only answer: http://cthulhu2012.com/

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