From BusinessWeek contributing economics editor Chris Farrell:
Housing: Time to Halt Taxpayer Subsidies
"What's more, the mortgage interest deduction is simply bad tax policy. It's sold as a middle-class subsidy, but since the value of the deduction goes up with the size of the mortgage, the biggest break is enjoyed by the highest-income households. For instance, the President's 2005 Advisory Panel on Federal Tax Reform calculated that individuals making more than $200,000 a year received more than eight times the benefit of those earning between $50,000 and $75,000 a year.
These days, no one can doubt that a home is an investment. It's an asset class, like stocks and bonds. Indeed, one reason why housing prices hit such stratospheric heights was the potent combination of owners treating homes as an investment, and the capital markets shoveling huge sums of money into real estate through such innovations as collateralized debt obligations (CDOs). For awhile, the net effect was to increase the liquidity of real estate "investments," supporting an unprecedented degree of speculation.
The tax code shouldn't bias investment money to favor one kind of investment over another—certainly not in an intensely competitive global economy".
51 comments:
"The tax code shouldn't bias investment money to favor one kind of investment over another"
Historically I dont think it did. Its been a long time since I looked at it, but if I recall correctly, this first came about in a court case. The taxpayer deducted his interest citing some provision of the code - the IRS responded in court saying that the provision was not meant to cover home interest decuctions - the supreme court disagreed with the IRS and sided with the taxpayer and the rest is history.
At that point, congress could have rewritten the code to explicitly exclude home morgage interest, or it could have balanced it out by giving a corresponding break to renters. It did neither. Now that tax break is so entrenched in homeowners, I think it would be near impossible to do away with.
One could just as easily argue that the tax code favors families with children over families and individuals without children. Similarly, one could argue that couples are vastly favored over singles. As in these cases, the basis for favoring homeowners over renters is that Congress feels that it makes for a more stable society. At least that's the official line. The unofficial line might be more along the lines of "He who has the gold makes the golden rules." Just like I don't expect to see childless couples or individuals treated equally as couples with children anytime soon, I don't see Congress taking away the mortgage deduction.
Did you know that in many jurisdictions between 1/3 and 1/2 (or more) of the budget goes toward supporting schools? That's hardly "fair" for those without kids ... nor a good use of resources since rarely do these children end up settling down (and paying tax dollars) in the same jurdiction that paid for their education.
Some things in life just aren't fair or intuitively smart ... but will never change ... at least not in our lifetimes.
You don't think funding schools is smart or fair?
It doesn't matter if you personally have children or not, the availability of education is of vast benefit to society in general.
You might want to cook up another analogy.
As for the original subject... this tax break is just a dumb policy.
As the article already explained this tax break does little to increase the rate of homeownership. Most of the benefit is realized by those who would have been homeowners anyway and are now encouraged to take on more debt than they otherwise would have.
Leroy said:
"It doesn't matter if you personally have children or not, the availability of education is of vast benefit to society in general."
Leroy, sometimes I swear you have a reading comprehension problem ... nor a good use of resources since rarely do these children end up settling down (and paying tax dollars) in the same jurdiction that paid for their education..
"You don't think funding schools is smart or fair?"
He said people with no kids may find it unfair.
Read before you post please!
Leroy:
"and are now encouraged to take on more debt than they otherwise would have."
You have it right before you, but you still don't understand! Debt is a good thing ... actually the best thing anywhere! If people didn't have debts to satisfy, they'd have no incentive to work .. They'd just content themselves with sitting around ... and still be living in caves ... or log cabins deep in the woods as in your case.
"Leroy, sometimes I swear you have a reading comprehension problem"
+1
Actually
+10 to that! I swear half of the arguments, er discussions, on this forum are due to a "selective" mis-read used to support ones own statements.
Wow, to hear you two talking about reading comprehension... what can I say?
First, regardless of whether or not the specific individuals educated at a specific school stay in that specific area the benefits vastly out weigh the costs.
You do realize that most people think beyond their own immediate self interest at least some of the time right? Even if children are growing up and moving to other areas the society as a whole benefits.
Second, I think you are greatly overestimating the percentage of people that leave their home cities and states. We have a much more mobile society today than 100 years ago but I suspect the majority of people in this county die in the same city or county they were born in.
From the sound of things both you and Doug are the classic baby-boomers that even in their middle aged years still think they are going to live and work forever.
If you are lucky you will live long enough to be cared for by your children's generation. This whole "it isn't fair to educate the next generation because I am not personally part of it" business is pretty sad if you ask me.
"He said people with no kids may find it unfair.
Read before you post please!"
I read what he said, and it is a pretty terrible argument. There are countless examples of policies that are unfair but public schools?
Anyone that honestly resents funding schools because they don't personally have children is a sad case of selfishness or ignorance.
The high levels of education achieved in this country are a key enabler of our current high standard of living. If we stopped funding schools today we would see the collapse of our society as we know it within decades.
Use your head.
"You have it right before you, but you still don't understand! Debt is a good thing ... actually the best thing anywhere! If people didn't have debts to satisfy, they'd have no incentive to work .. They'd just content themselves with sitting around ... and still be living in caves ... or log cabins deep in the woods as in your case."
I can only assume that you meant this as the joke it appears to be.
Do you honestly think people without debt have no incentive to work?
Why do I go to work? I have no debt to my name.
...and why do you think I live in the woods?
Leroy said:
"The high levels of education achieved in this country are a key enabler of our current high standard of living. If we stopped funding schools today we would see the collapse of our society as we know it within decades."
Notwithstanding the fact that we come in pretty low on the totem pole in regards to "level of education" vis-a-vis the rest of the industrialized world, if we stopped encouraging homeownership today through the mortgage deduction we would see the collapse of our society as we know it within decades.
I luv how you always try changing the focus of the argument when you know you haven't a leg to stand on ...
Leroy still cant read, lol!
You are arguing some huge lengthly post to us, but thats not what we were arguing.
We were arguing that the tax code is not fair to many lifestyles, not that public schools is a bad use of taxpayer money!
That was a hypothetical example of how SOME people MIGHT feel. Thats not a viewpoint we were sharing.
Use your own head and read for once!
"Notwithstanding the fact that we come in pretty low on the totem pole in regards to "level of education" vis-a-vis the rest of the industrialized world, if we stopped encouraging homeownership today through the mortgage deduction we would see the collapse of our society as we know it within decades."
Heh, The US education systems has its high and low points. While our primary education may not be the best in the industrialized world our universities are second to none. Not that that really has anything to do with whether or not it is "fair" to fund education.
...and of course your little theory of our society collapsing without a tax break for heavily indebted home "owners" is completely without merit.
"I luv how you always try changing the focus of the argument when you know you haven't a leg to stand on ..."
Hey cool, more spinning and general handwaving instead of any kind of worthwhile thought.
Let me get this straight though, you think equating a tax break for debtors to funding education is a "leg to stand on?"
When you are in a hole you need to just stop digging.
"Leroy still cant read, lol!
You are arguing some huge lengthly post to us, but thats not what we were arguing.
We were arguing that the tax code is not fair to many lifestyles, not that public schools is a bad use of taxpayer money!
That was a hypothetical example of how SOME people MIGHT feel. Thats not a viewpoint we were sharing.
Use your own head and read for once!"
I have an idea for you...
Why don't you scroll up to my first post in this thread.
Since you are such a big fan of "reading," why don't you go ahead and read that post?
Once you have done so for a second (first?) time you might notice this line:
"You might want to cook up another analogy."
I pointed out that his analogy was worthless then went on to discuss the original article.
It is you and lance who jumped into this in your typically misinformed and confused fashion to argue about who knows what.
Lance seems intent on defending his dumb analogy because as usual he is incapable of backing away from anything he has said, you on the other hand... don't seem to have anything to say at all.
"We were arguing that the tax code is not fair to many lifestyles, not that public schools is a bad use of taxpayer money!"
Oh really?
...and who is "we" in this case? Certainly not you because you haven't said a thing about tax policy in this thread.
I reluctantly have to agree with lance here. Damn, I hate that.
Tax breaks for having kids is the most unfair tax on the planet. When someone has a kid they use more community resources then say a single person. More schools, parks, hospitals, etc. This can not be argued. So, since they use more community services they should pay more then someone who doesn't right? This is the same logic they have for why the rich pay a larger % of their income towards tax.
All in all, tax breaks for kids is unfair, tax breaks for buying a house is unfair. If I could have one go away first it would be the tax break for kids. This is the most unfair.
Also, to correct one thing lance said, the tax code is biased against the married couple with no children. Single people actually have it a little easier then then a married couple. Smaller roth limits, etc, for the married couple.
Damn, I hate agreeing with lance on this. I need to go shower.
I strongly believe in public education, 1-12 only, but I believe that people that have the kids should pay a larger share of the expense not a smaller share. The cost of college should not be free to anyone, ever. Its a choice not a requirement. You can get a good job without college. Despite the liberal manifesto, not everyone should go to college.
The world needs ditch diggers too.
"Tax breaks for having kids is the most unfair tax on the planet."
This is flat-out wrong. The deduction for each child is a pittance in comparison with the cost of raising a child. In fact the deduction is so small that is simply has not distorted in any way the number of children that kids have. This is completely opposite to the tax break on interest. In fact this is one of the most common selling points for home ownership. To put it differently, you don’t hear doctors telling prospective parents they should have kids to get the tax break. By contrast, you do hear real estate agents telling prospective home buyers about the awesome tax breaks and subsidies that they can qualify for.
"When someone has a kid they use more community resources then say a single person. More schools, parks, hospitals, etc."
That's what property taxes are for.
"The world needs ditch diggers too."
Are you my friend, Mr. Scholarship winner?
dcbob-"Tax breaks for having kids is the most unfair tax on the planet."
No. You are really hopefully raising more tax payers in the future. It's a future bet to fund the pyramid scheme of social security.
Having more taxpayers will support more people who are retiring in the future.
God only knows the taxes I've paid have covered anything my parents paid and more!
I need to buy that home!!!
children = future taxpayers
"You can get a good job without college...The world needs ditch diggers too."
I guess we'll have to agree to disagree on what constitutes "a good job." Whackjob conspiracies about Liberal Manifestos notwithstanding.
"I live in a safe neighborhood. Why should my tax dollars be used to pay for the equipment used by the police rescue team?"
"My house isn't on fire. Why should I support the fire department with my taxes?"
"I use the toilet at work. Why should my tax dollars go to maintain the infrastructure that lets other people use a toilet at home?"
I can get much sillier than this on a Friday night...
listen, having kids is a choice. Buying a house or renting is not a choice, people need a place to live.
I agree that having a kid is expensive, more expensive then any tax deduction could ever give you. But it still doesn't change the fact that it is a choice.
why should you get a special tax break for a choice?
Perhaps because historically population increases have been economically advantageous to nations. In most places, they still are. In Russia (well, a part of Russia), Sept. 12 is Conception Day, when people are given a day off from work if they agree to try to make a baby; anybody giving birth on June 12 is eligible for cash and cars (I'll take door number three, Montski!).
Gruntled said...
"Perhaps because historically population increases have been economically advantageous to nations."
And they're even more economically advantageous to parents. Are all these kids being educated on my dime going to take care of me ... or their parents when they get old.
That said, I actually think public education is a great thing. Not because I expect anything directly back out of it, but because living in a country with well educated individuals is good for everyone .. and not just the direct beneficiaries. Now, if we could only get it right and educate our kids culturally like the European do (rather than "fill in the blank/ "true/false" like we do) we might have a chance at creating a nation of people who can think for themselves.
Ah, the mortgage interest deduction. I'm a tax lawyer, so I have my biases here.
The mortgage interest deduction isn't going anywhere; it's priced into the cost of housing and too many home owners will oppose its repeal. The deduction may, however, be replaced with a tax credit, which would give all taxpayers the same benefit for each dollar of interest paid. Currently, a taxpayer in the 15% marginal bracket gets a 15 cent tax saving for each dollar of interest paid, whereas a taxpayer in the 25% bracket gets a 25 cent savings, and so on. A tax credit would give everyone the same tax saving for each dollar of interest paid. The President organized a commission to propose alternatives to our current tax system, and the tax credit was one such proposal. Sen. Obama has adopted a similar "tax credit" approach in his proposal.
The larger question about tax breaks for children, etc. is really about how we want our tax system to function. We now use the tax code for many things other than to raise revenue. The mortgage interest deduction subsidizes home ownership, and there are credits and deductions for education, health care, R&D, alternative fuels, etc. We have Departments of Eduction, HUD, Commerce, HHS, and the EPA with the expertise to administer and encourage such things, but Congress uses the tax code as the mechanism to promote policy; thus, the IRS is charged with the task of enforcing and administering such laws. The problem this creates is that folks in my line of work have either accounting or a similarly limited background. When the tax code is filled with provisions that have nothing to do with the calculation of an individual's or company's economic income, but rather, were enacted to encourage some form of behavior, the code becomes that much more difficult to advise upon, administer, and enforce.
Terminator_X,
Wow, nicely written.
A flipper ... Even with the rising prices in the District, I doubt she'll succeed this time around:
"That has meant waning demand and then price cuts by sellers such as Jill Chodorov. She recently cut the asking price on her three-bedroom Cleveland Park condo from $1.3 million to $1.1 million.
Chodorov started what she described as a quality renovation of the condo immediately after she bought it in 2005. She said she spent $30,000 on the crown molding alone and rewired the place to include high-speed Internet. The condo, on the fourth floor of a 1920s art deco building, is one of the few units in the building with a private, heated garage.
"I felt it was priced right at $1.3 million, but the market decided otherwise," Chodorov said. "I feel it's a great value now." "
Sale Date Buyer Name Seller Name Address City Zip Sale Price
Her BUY Transactions:
03/05 CHODOROV, JILL MADDOX, G DAVID 3901 CONNECTICUT AV NW #405 Forest Hills, DC 20008 $710,000
10/03 CHODOROV JILL MELISS HORNE THELMA 1329 V ST NW Old City II, DC 20009 $291,000*
www.washingtonpost.com/wp-dyn/content/article/2008/04/18/AR2008041801540.html
The more tax deductions the better.
The more kids, the more tax breaks. Society needs kids. Otherwise the U.S. is going to turn into one giant nursing home.
Keep the housing deduction. In fact, we should give a $25,000 housing tax credit to any first time home buyers in this market.
Tax breaks for children makes sense if society is not producing enough children to sustain itself without the tax breaks. If Lance has no children and he doesn't want to pay for schools then he should not be able to collect social security in his old age because it's other people's children who would be paying for it.
dcbob: "listen, having kids is a choice. Buying a house or renting is not a choice, people need a place to live."
Are you serious? The choice is buy versus rent. You get a tax break for buying, and that tax break is far greater than the tax break for having a child. Therefore the tax break on interest is far more distortionary than the tax deduction for each child.
Lance: "And they're even more economically advantageous to parents. Are all these kids being educated on my dime going to take care of me ... or their parents when they get old."
Yes. It's called social security. Depending on your age, kids now may/will be paying for a portion of your retirement. If the kids born now are insufficient to pay for our generation's retirement then we will get less than the generation before us.
Moreover, the cost of having a child is mostly borne by parents and not subsidized by others. The only real way you subsidize my kid is if you are a homeowner and property tax but do not have a kid of your own. That, however, is entirely your decision and was known when you bought your house.
>
Are you serious? The choice is buy versus rent. You get a tax break for buying, and that tax break is far greater than the tax break for having a child. Therefore the tax break on interest is far more distortionary than the tax deduction for each child.<
People who buy houses stabilizes neighborhoods and build communities. Shower them with tax breaks, I say.
And, I agree, tax breaks for children make more sense then farm subsidies and oil companies. Individuals, single people, like myself have no cause to whine.
I just need to write this ... Single, working age males in America, have the more power, more freedom, more opportunity then at any other time in history. They live with less responsibility and less fear. They are privileged beyond all measure and any failure to take advantage of it is their failure and their failure alone.
They should be thankful that the amount of money that have to contribute, via taxes, to help families raise children is as small as it is. Republican individualism, in my view, is the opposite of manning-up to these modest responsibilities.
"People who buy houses stabilizes neighborhoods and build communities. Shower them with tax breaks, I say."
Then why not have massive rent control? That keeps old farts in the same apartment forever. The fact is that any subsidy is distortionary unless it is meant to encourage a positive externality. "Stabilizing a neighborhood" IMHO, does not qualify. Even if you disagree, just look at how "stabilized" neighborhoods in DC metro were between 2002 and 2007. The point is that the marginal homebuyer is more likely to be an investor, and the tax credit likely encourages more investors rather than honest homeowners.
I believe -- but am uncertain as I've never experienced this myself -- that one cannot take the mortgage tax deduction on multiple properties. This would suggest that the mortgage tax deduction is tilted away from investors / speculators and toward residents.
>> The point is that the marginal homebuyer is more likely to be an investor, and the tax credit likely encourages more investors rather than honest homeowners.<<
You are modifying the broader premise, not unhinging it.
What tax credit?
The $5,000 tax credit that DC gives to first time or the mortgage interest tax benefit? The $5,000 tax credit does little.
But didn't the marginal investors loose their investment as well? And whose fault is is that marginal buyers flooded this market?
"that one cannot take the mortgage tax deduction on multiple properties. This would suggest that the mortgage tax deduction is tilted away from investors / speculators and toward residents."
Absolutely not. Consider the demand curve for housing. When price is very high (relative to renting) the first people to buy will be those that have a very high intrinsic value for owning. That is, they want to set down in one location and moving would pose a considerable expense. Now move your way down that demand curve. As you approach very low prices of housing (versus renting) you will find that the marginal buyer is one who has puts less weight on owning versus renting. Part of the reason is that this individual places less of a cost on uprooting the family and moving to another location. Thus, the marginal homebuyer will tend more toward the investor (i.e. price arbitrager) than the person that only considers owning a viable option.
I see what you're saying; the mortgage tax credit certainly influences investors and I'm not saying it doesn't. What I am saying is that to the extent a tax credit affects the demand curve for both investors and pure residents, for a single home, it does so equally. My point, however, is that because the ability to get that credit is limited to a single "investment" (that is, I do not believe one can take a mortgage tax deduction on multiple properties) the tax law treats both investors and residents equally, and specifically screws investors who own multiple units, thereby adversely affecting the demand curve for multiple houses, which discourages large-scale speculation, which keeps prices down. I don't believe we are actually disagreeing in terms of facts, but in terms of the points we are trying to make.
Gruntled--First, I don't think this is entirely true. It is my understanding that you could own two places, designate one as a retirement property, and then flip the other. There were some restrictions on this, and I forget what they were. Someone else can chime in with more info.
Second, the other tax break that facilitated flipping was the elimination of capital gains tax (up to $500k) if you held the home for two years. The spec game was buy the home, live in it for 2 years, flip it, and then use the gains to trade up and then maybe flip that home, etc. I know many people, myself included, who made much money doing this. My only point in this entire steam of posts is that there are many tax benefits given to homeowners. Those tax benefits are significant and greatly distort the decision to own, thus encouraging investors to enter the market.
Generally, you CAN deduct mortgage interest and taxes on a second home.
http://www.bankrate.com/brm/itax/tax_adviser/20020111a.asp
There are rules, of course. For example, you have to use it personally as a (vacation) home for at least two weeks of the year.
And I forgot to mention that I am not at all denying that these tax credits do not influence both buyers and investors. My point was that the marginal buyer is more likely to be an investor and is therefore more sensitive to these subsidies. It is a marginal argument, not one of totals or averages.
gruntled said:
" My point, however, is that because the ability to get that credit is limited to a single "investment" (that is, I do not believe one can take a mortgage tax deduction on multiple properties) the tax law treats both investors and residents equally, and specifically screws investors who own multiple units, thereby adversely affecting the demand curve for multiple houses, which discourages large-scale speculation, which keeps prices down."
Come on Gruntle ... You should know better! After all, you're looking to buy a home.
Personal expenses are generally not deductible. That is why the mortgage deduction (and the property tax deduction) is a big deal. (It used to be that ALL interest was deductible until Reagan changed it.) Business expenses are generally deductible. Investors have business expenses ... including the mortgage interest expense.
Incidentally, yes the mortgage interest on a second home IS deductible ... (but not on a 3rd or 4th home.)
I am not looking to buy a home. As I have noted many times, I own a home in Arlington.
Yes, I understand one can take the mortgage tax deduction on two houses with some restrictions; I was referring to the practice of investors snapping up half a dozen properties. I don't believe the tax structure facilitated this, but I could be wrong.
Gruntled said:
"I was referring to the practice of investors snapping up half a dozen properties. I don't believe the tax structure facilitated this, but I could be wrong."
Investors get to expense the mortgage interest they pay (i.e., it is subtracted from revenue to arrive at taxable profit) ... that is even better than being able to take it as a deduction from income since deductions are "below the line" and carry more restrictions.
As for the tax structure "facilitating" investment ... a couple of thoughts:
Bush lowered the capital gains tax to 15%. This means that instead of being taxed at whatever your last dollar is taxed at (i.e., your marginal rate of 25%/28%/or whatever it is), it gets taxed at 15% for most folks and at only 5% for those with little income (e.g., retirees). This doesn't give "real estate investing" an edge over stock market investing since the same rules apply to that sort of investing. However, it did mean that because this "tax break" is for a limited time only many investors holding on to property for rental profits have had a big incentive to sell now rather than wait and risk getting taxed at something like 28%. In this sense, the tax structure favored bringing more houses to the market to be sold ... which helped keep prices lower than they would have been otherwise.
LOL, Leroy dug himself so deep in this one he ended up in China!
That last post of yours truly made no sense, it was barely comprehensible!
Doug said...
"LOL, Leroy dug himself so deep in this one he ended up in China!
That last post of yours truly made no sense, it was barely comprehensible!"
Yeah, his responses were almost painful to read ... I'm very embarassed for him! But, you know, I've noticed that if someone says "white" he'll immediately scream out " black". He was bound to get himself going down a road for a position he couldn't defend 'cause he adopted it before he even knew what it was ....
Lance Said
"Yeah, his responses were almost painful to read ... I'm very embarassed for him! But, you know, I've noticed that if someone says "white" he'll immediately scream out " black". He was bound to get himself going down a road for a position he couldn't defend 'cause he adopted it before he even knew what it was ...."
Ohh Lance I thougt it is you ...
Whatever lance...
If you honestly believe you look like anything but a fool continuing to claim to have some insight into housing considering your track record then you understand as little about people as you do economics.
Lance @ 6:06 AM
"Investors get to expense the mortgage interest they pay (i.e., it is subtracted from revenue to arrive at taxable profit) ... that is even better than being able to take it as a deduction from income since deductions are "below the line" and carry more restrictions."
Above-the-line real estate mortgage interest expenses are subject to substantial restrictions. An investor in real estate will typically be subject to the mind-numbing passive activity loss rules. Thus, investment property mortgage interest will only be expensed for tax purposes to the extent of rental income. If rental income is less than expenses, then there's no current tax benefit for the excess expenses. Our flipper friends who are renting out their houses to help pay their mortgage will find this out. Perhaps some of the real estate investors who lurk here can give us more perspective.
I do deduct interest expense from the income (rent) I collect. It has nothing to do with the mortgage interest deduction, but is an investment expense.
"Depreciation" is another expense I am required deduct. Essentially, I don't pay tax on the principal I collect because of my passive losses due to depreciation. As a result, my returns show me losing money because of this depreciation. I think I'll lose my passive loss carryover because it will be consumed by the depreciation recapture if, and when, I finally sell a property. But I guess I can use them to offset other capital gains. I don't get to apply any of my passive losses to the 3,000 investment deduction because of AMT.
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