Yeah I didn't think of it that way. We donate to charity a lot and some other stuff so I wasn't even considering the effect vs. standard deduction. Pretty interesting, the number is more like $500. Not nearly so concerned. I guess what it comes down to is if you are someone who has a lot of deductions in other areas, then deductions are important. But for a long time I only did the long form because of mortgage interst, and yeah, in those cases I probably wasn't saving all that much.
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Sir Landsharkresting shark faceRegistered Userregular
I apologize for drive-by posting but I only read the OP and I just wanted to quickly note that the interest deduction does factor into the rent you pay (the landlord has X in expenses, if the interest deduction reduces X by Y, he can also reduce his price by Y while still making the same profit). Now, is the full credit being passed onto you, the renter? Probably not, but it's not a straight wealth transfer kick in the nuts like you are making it out to be.
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Math time, and feel free to correct me if I'm missing anything.
On a 200K mortgage, at 5%, three years in, you should be paying about $9500 in interest. Now, if your top marginal rate is 25%, this means it can save you at most $2375 that year.
Except that you already get the standard deduction, which is like $6000 if single and $12K if married. Which means if you are married you now have to find like $2500 more in deductions to save a dime on it. If single, you're looking a little better, but it's still not necessarily saving more than than a grand or so if you can't find other significant deductions.
I mean... math makes it regressive. The more you make, the more you get back for this deduction. And the more you make, the bigger the house you buy, therefore the more you spend on your mortgage, therefore the more you can deduct. And if we're taking the standard deduction into account (which we have to when dealing with "reality"), it makes it even more regressive. I mean, I've provided substantial evidence for how rich people save way more money on it than poor people in this thread, Yar; what evidence do you have that that is not the case?
Proportional does not mean regressive. Progressive means rich people pay a higher percentage, not just more money, and regressive mean they pay a lower percentage, not just less money. If expenditure on interest is proportional to income, this is not regressive.
However, there are a couple of meaningful points there. For one, you also said that larger mortgages have a lower interest rate. The opposite is true. As mortgages go above around $400,000 and again around $800,000, they enter into new categories of risk that automatically add additional interest. So in that regard, the deduction can have a small regressive effect at certain points. However, it is primarily due to government backing of conventional mortgages that creates this disparity, so the net effect of government on citizen is still progressively costly. They may get more and more of a tax break, but it only becomes regressive when the even more progressively costly effects of Fannie and Freddie kick in.
I apologize for drive-by posting but I only read the OP and I just wanted to quickly note that the interest deduction does factor into the rent you pay (the landlord has X in expenses, if the interest deduction reduces X by Y, he can also reduce his price by Y while still making the same profit). Now, is the full credit being passed onto you, the renter? Probably not, but it's not a straight wealth transfer kick in the nuts like you are making it out to be.
That's actually a great point - removing the break would almost certainly increase rents roughly equivalent to the increase in taxes.
I apologize for drive-by posting but I only read the OP and I just wanted to quickly note that the interest deduction does factor into the rent you pay (the landlord has X in expenses, if the interest deduction reduces X by Y, he can also reduce his price by Y while still making the same profit). Now, is the full credit being passed onto you, the renter? Probably not, but it's not a straight wealth transfer kick in the nuts like you are making it out to be.
Does the home mortgage deduction apply to rental properties? I was under the impression that it did not, and that instead interest on a rental property would fall under a business expense related to that rental property.
Math time, and feel free to correct me if I'm missing anything.
On a 200K mortgage, at 5%, three years in, you should be paying about $9500 in interest. Now, if your top marginal rate is 25%, this means it can save you at most $2375 that year.
Except that you already get the standard deduction, which is like $6000 if single and $12K if married. Which means if you are married you now have to find like $2500 more in deductions to save a dime on it. If single, you're looking a little better, but it's still not necessarily saving more than than a grand or so if you can't find other significant deductions.
I know that for us, the property tax and MIP easily make it worth itemizing over just taking the standard deduction. Our property tax is relatively high though ($5k / year for 200k house). We also just refinanced this year (3.5% woohoo! - should beat interest over 30 years) which kicked me in the nuts on MIP, but well worth it in the long run.
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Sir Landsharkresting shark faceRegistered Userregular
I apologize for drive-by posting but I only read the OP and I just wanted to quickly note that the interest deduction does factor into the rent you pay (the landlord has X in expenses, if the interest deduction reduces X by Y, he can also reduce his price by Y while still making the same profit). Now, is the full credit being passed onto you, the renter? Probably not, but it's not a straight wealth transfer kick in the nuts like you are making it out to be.
Does the home mortgage deduction apply to rental properties? I was under the impression that it did not, and that instead interest on a rental property would fall under a business expense related to that rental property.
Ah, you are probably right. Although if you are deducting interest either way it's going to have a similar effect.
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Put me in the "kill it with fire" camp. Dumb deduction for dumb reasons.
Also, I would like to see pretty much every homestead exemption ever done away with. Basically, we need to get away from the idea of a person home being different than any other investment.
I think we need to get away from the idea of a home being an investment, period. A lot of the distortion of the market surrounds people playing house prices like they were financial instruments. Regulations and laws surrounding housing that inflate the cost also spring from the culture of housing as a financial instrument.
One of the secrets of homebuilding is that, in an era of soaring housing costs, the cost of materials and labor have fallen dramatically in the last 30 years. We've seen an evolution from skilled tradesmen working wood and materials on site to low-skill workers literally stapling and gluing together prefab materials. This is part of what fueled the McMansion boom - contractors can order all the "nice" bits out of a catalogue on the cheap instead of having to hire a master carpenter.
All that saving was swallowed by the homebuilding industry, which spurred the housing gold rush. Unlike most markets, the customers didn't mind because the investment culture made them love the soaring prices.
Math time, and feel free to correct me if I'm missing anything.
On a 200K mortgage, at 5%, three years in, you should be paying about $9500 in interest. Now, if your top marginal rate is 25%, this means it can save you at most $2375 that year.
Except that you already get the standard deduction, which is like $6000 if single and $12K if married. Which means if you are married you now have to find like $2500 more in deductions to save a dime on it. If single, you're looking a little better, but it's still not necessarily saving more than than a grand or so if you can't find other significant deductions.
I know that for us, the property tax and MIP easily make it worth itemizing over just taking the standard deduction. Our property tax is relatively high though ($5k / year for 200k house). We also just refinanced this year (3.5% woohoo! - should beat interest over 30 years) which kicked me in the nuts on MIP, but well worth it in the long run.
Oh, that's right, property tax. That's what got us over the line where it actually saved us money.
We didn't have much else to deduct after that, though.
Does the home mortgage deduction apply to rental properties? I was under the impression that it did not, and that instead interest on a rental property would fall under a business expense related to that rental property.
Landlords can deduct interest on any loans used to acquire or improve rental properties as well as any interest on credit cards used for goods and services for the rental property.
EDIT: But I guess the salient question is whether removing the interest deduction would have any effect on this, which I guess it would not.
Yar on
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Sir Landsharkresting shark faceRegistered Userregular
One other point is, in the long-run, the interest deduction likely did nothing but inflate the price of homes. I doubt I can afford any better of a home now than I could in a theoretical universe without the deduction, because without the deduction in place the same home would likely cost less. So all we really ended up doing was driving up prices for all those middle-men that take a nice % based cut (realtors, localities that have sale/transfer taxes, banks) off of the housing market.
Of course, killing it immediately could be somewhat problematic, but maybe it can be replaced with a credit that is slowly phased out?
Please consider the environment before printing this post.
I apologize for drive-by posting but I only read the OP and I just wanted to quickly note that the interest deduction does factor into the rent you pay (the landlord has X in expenses, if the interest deduction reduces X by Y, he can also reduce his price by Y while still making the same profit). Now, is the full credit being passed onto you, the renter? Probably not, but it's not a straight wealth transfer kick in the nuts like you are making it out to be.
Does the home mortgage deduction apply to rental properties? I was under the impression that it did not, and that instead interest on a rental property would fall under a business expense related to that rental property.
This is correct.
The flip side is that rental property has to pay tax on the money it makes both over time and when you sell it while homeowner do not.
Edit: duh
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Sir Landsharkresting shark faceRegistered Userregular
I was curious, so I went to the Googles and tried to figure out the history of the mortgage interest deduction. From Wiki:
Prior to the Tax Reform Act of 1986 (TRA86), the interest on all personal loans (including credit card debt) was deductible. TRA86 eliminated that broad deduction, but created the narrower home mortgage interest deduction under the theory that it would encourage home ownership.[15] A New York Times article notes that, in 1913, when interest deductions started, Congress "certainly wasn't thinking of the interest deduction as a stepping-stone to middle-class homeownership, because the tax excluded the first $3,000 (or for married couples, $4,000) of income; less than 1 percent of the population earned more than that;" moreover, during that era, most people who purchased homes paid upfront rather than taking out a mortgage. Rather, the reason for the deduction was that in a nation of small proprietors, it was more difficult to separate business and personal expenses, and so it was simpler to just allow deduction of all interest.
So it looks like initially all interest was deductible, and since then we have allowed businesses (including landlords) to continue to deduct interest as a business expense while the Tax Reform Act wiped out all deductions for personal loans with the exception of the mortgage interest deduction.
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While it's outside the scope of this thread, I've thought about whether we should end interest deduction for businesses as well. It would be a neat way to bypass the double taxation argument about dividends and capital gains.
But I'm convinced that no type of personal debt interest should be deductible. Terrible, terrible incentive.
One other point is, in the long-run, the interest deduction likely did nothing but inflate the price of homes. I doubt I can afford any better of a home now than I could in a theoretical universe without the deduction, because without the deduction in place the same home would likely cost less. So all we really ended up doing was driving up prices for all those middle-men that take a nice % based cut (realtors, localities that have sale/transfer taxes, banks) off of the housing market.
Of course, killing it immediately could be somewhat problematic, but maybe it can be replaced with a credit that is slowly phased out?
How To Kill the Mortgage Deduction
1): Introduce a means-tested first-time homebuyer's down payment subsidy. (After your first time buying a home, hopefully, you'll have some equity and can pay your own damn down payment.)
2): Grandfather out the current mortgage deduction - it will not apply to any new mortgages past [Date] but continues to apply for mortgages already benefiting from it. Yes, this drives a temporary spike in housing prices as rich people try to find a tax shelter to hold on to. The prices after [Date] will crater so they just spent a lot of money stupidly.
3): Immediately and irrevocably prevent it from applying to more than one home. I don't even care about trying to make it apply to the primary residence, but no taxpayer gets to take the deduction twice.
While it's outside the scope of this thread, I've thought about whether we should end interest deduction for businesses as well. It would be a neat way to bypass the double taxation argument about dividends and capital gains.
But I'm convinced that no type of personal debt interest should be deductible. Terrible, terrible incentive.
So long as we prefer to finance higher education through personal debt, we need to keep the student loan interest deduction.
Yes, this drives a temporary spike in housing prices as rich people try to find a tax shelter to hold on to. The prices after [Date] will crater so they just spent a lot of money stupidly.
Correct me if I'm wrong, but I don't think that the mortgage deduction can ever function as a tax shelter. Interest is a liability, not a capital expenditure. You would always be better off financially with neither the debt nor the deduction. That is part of the reasoning behind it to begin with. While it does incentivize increased debt to some degree, it doesn't incentivize debt you don't need at all.
While it's outside the scope of this thread, I've thought about whether we should end interest deduction for businesses as well. It would be a neat way to bypass the double taxation argument about dividends and capital gains.
But I'm convinced that no type of personal debt interest should be deductible. Terrible, terrible incentive.
Wouldn't that make it almost impossible to start a business if you didn't already have a lot of wealth?
(feel free to pm me if you think it is of topic but It seems to me to be included in discussing why personal debt is different than buisiness debt.)
Yeah I didn't think of it that way. We donate to charity a lot and some other stuff so I wasn't even considering the effect vs. standard deduction. Pretty interesting, the number is more like $500. Not nearly so concerned. I guess what it comes down to is if you are someone who has a lot of deductions in other areas, then deductions are important. But for a long time I only did the long form because of mortgage interst, and yeah, in those cases I probably wasn't saving all that much.
I would not have a problem with people currently getting the writeoff being grandfathered in, or with a graduated decline in the value of the writeoff in order to mitigate the effects on people who were counting on it.
I mean... math makes it regressive. The more you make, the more you get back for this deduction. And the more you make, the bigger the house you buy, therefore the more you spend on your mortgage, therefore the more you can deduct. And if we're taking the standard deduction into account (which we have to when dealing with "reality"), it makes it even more regressive. I mean, I've provided substantial evidence for how rich people save way more money on it than poor people in this thread, Yar; what evidence do you have that that is not the case?
Proportional does not mean regressive. Progressive means rich people pay a higher percentage, not just more money, and regressive mean they pay a lower percentage, not just less money. If expenditure on interest is proportional to income, this is not regressive.
However, there are a couple of meaningful points there. For one, you also said that larger mortgages have a lower interest rate. The opposite is true. As mortgages go above around $400,000 and again around $800,000, they enter into new categories of risk that automatically add additional interest. So in that regard, the deduction can have a small regressive effect at certain points. However, it is primarily due to government backing of conventional mortgages that creates this disparity, so the net effect of government on citizen is still progressively costly. They may get more and more of a tax break, but it only becomes regressive when the even more progressively costly effects of Fannie and Freddie kick in.
If I pay $10,000 in interest and I make $35,000 a year, I get $1500 back. If I pay $10,000 in interest and I make $400,000 a year, I get $3900 back. Thus, regressive.
The interesting thing I've seen emerging here is the numbers being quoted for how small so many people think the mortgage deduction is. In a big city with high home value this is distinctly not true. People aren't buying homes for $200K or something, the numbers are closer to $500K (and higher) which leads to giant mortgage deductions, far bigger than the standard deduction. Anecdotaly, I don't know anyone who makes a good living and DOESN'T own a home who got a tax rebate or vice versa. Owning a home and paying the mortgage on it corresponds to cash in your pocket each year.
Interest is the opposite of investment gain. It is essentially money you lose as punishment for not having enough money. It's almost like an investment or busines loss. That's why it is deducted from income, because it's kind of the opposite of income. No one ever said "hey, I should take on some debt, because the interst is tax deductible!" That would be like saying, "hey, I should ask my boss to pay me less, so that my taxes are less!"
Yes, this drives a temporary spike in housing prices as rich people try to find a tax shelter to hold on to. The prices after [Date] will crater so they just spent a lot of money stupidly.
Correct me if I'm wrong, but I don't think that the mortgage deduction can ever function as a tax shelter. Interest is a liability, not a capital expenditure. You would always be better off financially with neither the debt nor the deduction. That is part of the reasoning behind it to begin with. While it does incentivize increased debt to some degree, it doesn't incentivize debt you don't need at all.
"Tax shelter" was not the correct term; I was in a hurry and imprecise. It will incentivize those with the means to take advantage of the tax break while they still can - people buying retirement homes earlier, for example.
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Sir Landsharkresting shark faceRegistered Userregular
The interesting thing I've seen emerging here is the numbers being quoted for how small so many people think the mortgage deduction is. In a big city with high home value this is distinctly not true. People aren't buying homes for $200K or something, the numbers are closer to $500K (and higher) which leads to giant mortgage deductions, far bigger than the standard deduction. Anecdotaly, I don't know anyone who makes a good living and DOESN'T own a home who got a tax rebate or vice versa. Owning a home and paying the mortgage on it corresponds to cash in your pocket each year.
What are you calling a tax rebate? I doubt anyone that makes enough to own a home actually gets a tax credit. If you are talking about people getting a refund for overpaying their taxes throughout the year, well, you can get one too if you increase your witholding amount.
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Interest is the opposite of investment gain. It is essentially money you lose as punishment for not having enough money. It's almost like an investment or busines loss. That's why it is deducted from income, because it's kind of the opposite of income. No one ever said "hey, I should take on some debt, because the interst is tax deductible!" That would be like saying, "hey, I should ask my boss to pay me less, so that my taxes are less!"
Well, I mean, people do, but those people are idiots, so
The interesting thing I've seen emerging here is the numbers being quoted for how small so many people think the mortgage deduction is. In a big city with high home value this is distinctly not true. People aren't buying homes for $200K or something, the numbers are closer to $500K (and higher) which leads to giant mortgage deductions, far bigger than the standard deduction. Anecdotaly, I don't know anyone who makes a good living and DOESN'T own a home who got a tax rebate or vice versa. Owning a home and paying the mortgage on it corresponds to cash in your pocket each year.
What are you calling a tax rebate? I doubt anyone that makes enough to own a home actually gets a tax credit. If you are talking about people getting a refund for overpaying their taxes throughout the year, well, you can get one too if you increase your witholding amount.
If you follow the 'standard' method of setting your withholding (1 allowance for me, both state and federal) then homeowners usually get a rebate and renters usually owe more tax. Smart homeowners would probably calculate their interest payments in advance and pay less tax through the year, smart renters can say 'Well, at least I earned extra interest on the money before I gave it to the government' BUT it doesn't change the fact that Bob who owes $3000 a month in rent and earns $100K is effectively making a transfer payment to Jim who owes $3000 a month on his mortgage and earns $150K. Deduct how you want, call it what you like, Bob is helping pay for Jims house. And he's doing so using money that he could otherwise save towards buying his own house.
One other point is, in the long-run, the interest deduction likely did nothing but inflate the price of homes. I doubt I can afford any better of a home now than I could in a theoretical universe without the deduction, because without the deduction in place the same home would likely cost less. So all we really ended up doing was driving up prices for all those middle-men that take a nice % based cut (realtors, localities that have sale/transfer taxes, banks) off of the housing market.
Of course, killing it immediately could be somewhat problematic, but maybe it can be replaced with a credit that is slowly phased out?
How To Kill the Mortgage Deduction
1): Introduce a means-tested first-time homebuyer's down payment subsidy. (After your first time buying a home, hopefully, you'll have some equity and can pay your own damn down payment.)
2): Grandfather out the current mortgage deduction - it will not apply to any new mortgages past [Date] but continues to apply for mortgages already benefiting from it. Yes, this drives a temporary spike in housing prices as rich people try to find a tax shelter to hold on to. The prices after [Date] will crater so they just spent a lot of money stupidly.
3): Immediately and irrevocably prevent it from applying to more than one home. I don't even care about trying to make it apply to the primary residence, but no taxpayer gets to take the deduction twice.
Why not just introduce a percentage deduction instead of an outright one? Start at 99% and work your way backwards to 0 over the next 100 years.
One other point is, in the long-run, the interest deduction likely did nothing but inflate the price of homes. I doubt I can afford any better of a home now than I could in a theoretical universe without the deduction, because without the deduction in place the same home would likely cost less. So all we really ended up doing was driving up prices for all those middle-men that take a nice % based cut (realtors, localities that have sale/transfer taxes, banks) off of the housing market.
Of course, killing it immediately could be somewhat problematic, but maybe it can be replaced with a credit that is slowly phased out?
How To Kill the Mortgage Deduction
1): Introduce a means-tested first-time homebuyer's down payment subsidy. (After your first time buying a home, hopefully, you'll have some equity and can pay your own damn down payment.)
2): Grandfather out the current mortgage deduction - it will not apply to any new mortgages past [Date] but continues to apply for mortgages already benefiting from it. Yes, this drives a temporary spike in housing prices as rich people try to find a tax shelter to hold on to. The prices after [Date] will crater so they just spent a lot of money stupidly.
3): Immediately and irrevocably prevent it from applying to more than one home. I don't even care about trying to make it apply to the primary residence, but no taxpayer gets to take the deduction twice.
Why not just introduce a percentage deduction instead of an outright one? Start at 99% and work your way backwards to 0 over the next 100 years.
The tough thing about eliminating the mortgage deduction would be the effect on home values, they would return to their 'real' levels. Good for society and for people who don't own a home, bad for people who do. Even thinking about eliminating it over X years would drive prices down.
It needs to go, but it's VERY hard to get rid of it. I think a limit is the sensible way to go. So you can deduct a maximum of X over the year, where we set X as the same or close to the standard deduction. So if you own a home, and donate to charity etc then it helps you save some money.
If I pay $10,000 in interest and I make $35,000 a year, I get $1500 back. If I pay $10,000 in interest and I make $400,000 a year, I get $3900 back. Thus, regressive.
Ehh... only because the tax tables are progressive? Your math is double-counting here. A flat tax rate to begin with would fix your problem, and thus it's a bit disingenuous to call this regressive. In fact, we should make the tax brackets regressive, and then the mortgage deduction would be progressive, m i rite?
There is no "get back." If you pay 10,000 in interest and make $35,000 a year, your tax is $3,315: 13.3% of your taxable income, 9.5% of your gross income. If you pay $10,000 in interest and make $400,000 a year, your tax is $113,261: 29% of your taxable income, 28% of your gross income. The latter makes 11 times as much money but pays 34 times as much in taxes. That is not regressive. It is merely "slightly less progressive" than it would be without the deduction.
"Tax shelter" was not the correct term; I was in a hurry and imprecise. It will incentivize those with the means to take advantage of the tax break while they still can - people buying retirement homes earlier, for example.
Right... it might prompt some people who are going ot be taking on debt anyway to take it on sooner rather than later, or at a slightly higher amoint than they would later, but it wouldn't do much to prompt anyone to take on debt that they weren't otherwise planning to take on.
Yeah I didn't think of it that way. We donate to charity a lot and some other stuff so I wasn't even considering the effect vs. standard deduction. Pretty interesting, the number is more like $500. Not nearly so concerned. I guess what it comes down to is if you are someone who has a lot of deductions in other areas, then deductions are important. But for a long time I only did the long form because of mortgage interst, and yeah, in those cases I probably wasn't saving all that much.
I would not have a problem with people currently getting the writeoff being grandfathered in, or with a graduated decline in the value of the writeoff in order to mitigate the effects on people who were counting on it.
I mean... math makes it regressive. The more you make, the more you get back for this deduction. And the more you make, the bigger the house you buy, therefore the more you spend on your mortgage, therefore the more you can deduct. And if we're taking the standard deduction into account (which we have to when dealing with "reality"), it makes it even more regressive. I mean, I've provided substantial evidence for how rich people save way more money on it than poor people in this thread, Yar; what evidence do you have that that is not the case?
Proportional does not mean regressive. Progressive means rich people pay a higher percentage, not just more money, and regressive mean they pay a lower percentage, not just less money. If expenditure on interest is proportional to income, this is not regressive.
However, there are a couple of meaningful points there. For one, you also said that larger mortgages have a lower interest rate. The opposite is true. As mortgages go above around $400,000 and again around $800,000, they enter into new categories of risk that automatically add additional interest. So in that regard, the deduction can have a small regressive effect at certain points. However, it is primarily due to government backing of conventional mortgages that creates this disparity, so the net effect of government on citizen is still progressively costly. They may get more and more of a tax break, but it only becomes regressive when the even more progressively costly effects of Fannie and Freddie kick in.
If I pay $10,000 in interest and I make $35,000 a year, I get $1500 back. If I pay $10,000 in interest and I make $400,000 a year, I get $3900 back. Thus, regressive.
This really isn't the case though.
someone making 35k, with the standard deductions owes $3,915 in federal taxes(13.5%). Going to the mortgage deduction(and how someone making 35k gets a mortgage with that much interest). Grabbing the deduction lowers their bill to 3,315(13.26%), saving them $600 or 15%.
for someone making 400k, it goes from 116,761(29.19%) to 113,261(29.4%); saving them 3500, or 2.9% on their bill.
If I pay $10,000 in interest and I make $35,000 a year, I get $1500 back. If I pay $10,000 in interest and I make $400,000 a year, I get $3900 back. Thus, regressive.
Ehh... only because the tax tables are progressive? Your math is double-counting here. A flat tax rate to begin with would fix your problem, and thus it's a bit disingenuous to call this regressive. In fact, we should make the tax brackets regressive, and then the mortgage deduction would be progressive, m i rite?
There is no "get back." If you pay 10,000 in interest and make $35,000 a year, your tax is $3,315: 13.3% of your taxable income, 9.5% of your gross income. If you pay $10,000 in interest and make $400,000 a year, your tax is $113,261: 29% of your taxable income, 28% of your gross income. The latter makes 11 times as much money but pays 34 times as much in taxes. That is not regressive. It is merely "slightly less progressive" than it would be without the deduction.
"If the law didn't exist as it does, this wouldn't be regressive" isn't really a great argument.
Yeah I didn't think of it that way. We donate to charity a lot and some other stuff so I wasn't even considering the effect vs. standard deduction. Pretty interesting, the number is more like $500. Not nearly so concerned. I guess what it comes down to is if you are someone who has a lot of deductions in other areas, then deductions are important. But for a long time I only did the long form because of mortgage interst, and yeah, in those cases I probably wasn't saving all that much.
I would not have a problem with people currently getting the writeoff being grandfathered in, or with a graduated decline in the value of the writeoff in order to mitigate the effects on people who were counting on it.
I mean... math makes it regressive. The more you make, the more you get back for this deduction. And the more you make, the bigger the house you buy, therefore the more you spend on your mortgage, therefore the more you can deduct. And if we're taking the standard deduction into account (which we have to when dealing with "reality"), it makes it even more regressive. I mean, I've provided substantial evidence for how rich people save way more money on it than poor people in this thread, Yar; what evidence do you have that that is not the case?
Proportional does not mean regressive. Progressive means rich people pay a higher percentage, not just more money, and regressive mean they pay a lower percentage, not just less money. If expenditure on interest is proportional to income, this is not regressive.
However, there are a couple of meaningful points there. For one, you also said that larger mortgages have a lower interest rate. The opposite is true. As mortgages go above around $400,000 and again around $800,000, they enter into new categories of risk that automatically add additional interest. So in that regard, the deduction can have a small regressive effect at certain points. However, it is primarily due to government backing of conventional mortgages that creates this disparity, so the net effect of government on citizen is still progressively costly. They may get more and more of a tax break, but it only becomes regressive when the even more progressively costly effects of Fannie and Freddie kick in.
If I pay $10,000 in interest and I make $35,000 a year, I get $1500 back. If I pay $10,000 in interest and I make $400,000 a year, I get $3900 back. Thus, regressive.
This really isn't the case though.
someone making 35k, with the standard deductions owes $3,915 in federal taxes(13.5%). Going to the mortgage deduction(and how someone making 35k gets a mortgage with that much interest). Grabbing the deduction lowers their bill to 3,315(13.26%), saving them $600 or 15%.
for someone making 400k, it goes from 116,761(29.19%) to 113,261(29.4%); saving them 3500, or 2.9% on their bill.
"If the law didn't exist as it does, this wouldn't be regressive" isn't really a great argument.
I don't understand what you're saying. If it's only regressive because it's progressive, that doesn't really make any sense. Pretty sure that is a decent argument.
Yes, it is good that you understand this fundamental principle of a progressive tax system.
And bad that you are taking such a circuitous path to admitting that calling the deduction "regressive" wasn't a very meaningful statement. If all deductions are regressive, then you aren't really making a point about mortgage deductions. Nevertheless, all we need to do is agree on a consistent mechanism for comparing taxes among different incomes and your point disappears. Generally, the comparison is how the percentage moves in relation to the total. In your example, the $35,000 income got 4.2% of his income reduced from his taxes, while the $400,000 income only got 0.9% reduced from his. Even the deduction is still quite progressively costly in terms of its decreasing relative benefit.
"If the law didn't exist as it does, this wouldn't be regressive" isn't really a great argument.
I don't understand what you're saying. If it's only regressive because it's progressive, that doesn't really make any sense. Pretty sure that is a decent argument.
Yes, it is good that you understand this fundamental principle of a progressive tax system.
And bad that you are taking such a circuitous path to admitting that calling the deduction "regressive" wasn't a very meaningful statement. If all deductions are regressive, then you aren't really making a point about mortgage deductions. Nevertheless, all we need to do is agree on a consistent mechanism for comparing taxes among different incomes and your point disappears. Generally, the comparison is how the percentage moves in relation to the total. In your example, the $35,000 income got 4.2% of his income reduced from his taxes, while the $400,000 income only got 0.9% reduced from his. Even the deduction is still quite progressively costly in terms of its decreasing relative benefit.
Well, if we're going to do our math this way, then we need to recognize that the guy making $35,000 and owning a house is almost certainly married and has no other deductions, so in reality, he's going to be taking $0, because he's going to take the standard deduction. Whereas the guy making $400,000, that's probably his second house, and he has a bunch of other deductions he takes (like his yacht deduction), so he's getting the full $3900 out of it, or if we really want to split up the standard between all of his likely deductions, probably $3500ish.
So, percentage-wise, his deduction is over a billion times more than the guy making $35,000, since it is around 4% of his income, versus 0% of the other guy's.
As if it needed further illustrating:
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surrealitychecklonely, but not unloveddreaming of faulty keys and latchesRegistered Userregular
edited March 2013
also diminishing marginal utility of da moneyz
if a rich person loses 3% of his income to taxation it affects basically nothing
if a poorbro in the us (with its incredibly high nondiscretionary spending for lower middle class people) loses 3% it can fuck him in the ass
not that this is directly relevant here
surrealitycheck on
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kaliyamaLeft to find less-moderated foraRegistered Userregular
edited March 2013
The part of this that is going undercommented is that this just drives up home prices because it effectively makes loans cheaper, which means people build this in to their calculations and so wil bid higher.
The deduction just increases demand for housing which raises home prices - good for banks and sellers, bad for buyers.
Two questions...first, is there benefit to incentivizing debt if it is secure debt and has the effect of increasing circulation? Second, the standard deduction might be on par with the average homeowner's itemized deduction (which I rather suspect is the point), but what about people with enough deductible expenses from other quarters to make the standard deduction non-viable? (Not all of us are above the median income)
Let not any one pacify his conscience by the delusion that he can do no harm if he takes no part, and forms no opinion.
Two questions...first, is there benefit to incentivizing debt if it is secure debt and has the effect of increasing circulation? Second, the standard deduction might be on par with the average homeowner's itemized deduction (which I rather suspect is the point), but what about people with enough deductible expenses from other quarters to make the standard deduction non-viable? (Not all of us are above the median income)
To the first: if anything, I think this makes the debt less secure. Let's just look at the housing crisis. Because the government is de facto subsidizing the interest, people are willing to take out larger loans and secure it with smaller down payments (all the way down to zero, in fact).
As to the second, most people who aren't rich who are taking it are donating to churches. I don't feel like the government should be subsidizing religion. And I feel like people who are rich and taking it really don't need it. Also, even for those people, the difference between the standard deduction and what they take by itemizing is going to be very small in comparison with what wealthy people are taking..
I'm not talking about secured as in there being some collateral somewhere, but rather secure as in the creditor has a good chance of recovering the principal if things go tits up. Personally, I wouldn't consider any debt with a loan to value above 80% to be secure. (Before I started raping the environment with a fuel-guzzling semi, I made my way raping the environment with tract housing developments...don't get me started on the imbecility of 100% financing) Conversely, I do consider student loans secure, even though there is no collateral, since there is nothing you can do to escape that debt beyond dying penniless (they will garnish your social security if you ignore them long enough).
As for the other, it isn't just people making charitable donations. Personally, my work related deductions top $15,000. That isn't abnormal for my line of work and is before I even get near my home expenses, so yeah, that mortgage deduction plays a not inconsequential role.
Let not any one pacify his conscience by the delusion that he can do no harm if he takes no part, and forms no opinion.
I think there's a big disconnect in this thread between "I benefit from this deduction and shouldn't pay more in taxes" and "this deduction is good policy."
Well, your work deductions are pretty abnormal for the population as a whole. I'd bet the median work expense deduction is zero, or near enough.
And I'd bet the average taxpayer in my bracket is taking the standard deduction. That is more or less the point. You may get a deduction that covers you mortgage interest and similar expenses. You are arguing that I should eat those costs because I have other expenses as well.
Another way to put it is, if the standard deduction is what the median homeowner would itemize with mortgage interest, what justifies keeping it that high if you get rid of the interest deduction?
Let not any one pacify his conscience by the delusion that he can do no harm if he takes no part, and forms no opinion.
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On a 200K mortgage, at 5%, three years in, you should be paying about $9500 in interest. Now, if your top marginal rate is 25%, this means it can save you at most $2375 that year.
Except that you already get the standard deduction, which is like $6000 if single and $12K if married. Which means if you are married you now have to find like $2500 more in deductions to save a dime on it. If single, you're looking a little better, but it's still not necessarily saving more than than a grand or so if you can't find other significant deductions.
Proportional does not mean regressive. Progressive means rich people pay a higher percentage, not just more money, and regressive mean they pay a lower percentage, not just less money. If expenditure on interest is proportional to income, this is not regressive.
However, there are a couple of meaningful points there. For one, you also said that larger mortgages have a lower interest rate. The opposite is true. As mortgages go above around $400,000 and again around $800,000, they enter into new categories of risk that automatically add additional interest. So in that regard, the deduction can have a small regressive effect at certain points. However, it is primarily due to government backing of conventional mortgages that creates this disparity, so the net effect of government on citizen is still progressively costly. They may get more and more of a tax break, but it only becomes regressive when the even more progressively costly effects of Fannie and Freddie kick in.
That's actually a great point - removing the break would almost certainly increase rents roughly equivalent to the increase in taxes.
Does the home mortgage deduction apply to rental properties? I was under the impression that it did not, and that instead interest on a rental property would fall under a business expense related to that rental property.
I know that for us, the property tax and MIP easily make it worth itemizing over just taking the standard deduction. Our property tax is relatively high though ($5k / year for 200k house). We also just refinanced this year (3.5% woohoo! - should beat interest over 30 years) which kicked me in the nuts on MIP, but well worth it in the long run.
Ah, you are probably right. Although if you are deducting interest either way it's going to have a similar effect.
I think we need to get away from the idea of a home being an investment, period. A lot of the distortion of the market surrounds people playing house prices like they were financial instruments. Regulations and laws surrounding housing that inflate the cost also spring from the culture of housing as a financial instrument.
One of the secrets of homebuilding is that, in an era of soaring housing costs, the cost of materials and labor have fallen dramatically in the last 30 years. We've seen an evolution from skilled tradesmen working wood and materials on site to low-skill workers literally stapling and gluing together prefab materials. This is part of what fueled the McMansion boom - contractors can order all the "nice" bits out of a catalogue on the cheap instead of having to hire a master carpenter.
All that saving was swallowed by the homebuilding industry, which spurred the housing gold rush. Unlike most markets, the customers didn't mind because the investment culture made them love the soaring prices.
Oh, that's right, property tax. That's what got us over the line where it actually saved us money.
We didn't have much else to deduct after that, though.
Landlords can deduct interest on any loans used to acquire or improve rental properties as well as any interest on credit cards used for goods and services for the rental property.
EDIT: But I guess the salient question is whether removing the interest deduction would have any effect on this, which I guess it would not.
Of course, killing it immediately could be somewhat problematic, but maybe it can be replaced with a credit that is slowly phased out?
The flip side is that rental property has to pay tax on the money it makes both over time and when you sell it while homeowner do not.
Edit: duh
So it looks like initially all interest was deductible, and since then we have allowed businesses (including landlords) to continue to deduct interest as a business expense while the Tax Reform Act wiped out all deductions for personal loans with the exception of the mortgage interest deduction.
But I'm convinced that no type of personal debt interest should be deductible. Terrible, terrible incentive.
How To Kill the Mortgage Deduction
1): Introduce a means-tested first-time homebuyer's down payment subsidy. (After your first time buying a home, hopefully, you'll have some equity and can pay your own damn down payment.)
2): Grandfather out the current mortgage deduction - it will not apply to any new mortgages past [Date] but continues to apply for mortgages already benefiting from it. Yes, this drives a temporary spike in housing prices as rich people try to find a tax shelter to hold on to. The prices after [Date] will crater so they just spent a lot of money stupidly.
3): Immediately and irrevocably prevent it from applying to more than one home. I don't even care about trying to make it apply to the primary residence, but no taxpayer gets to take the deduction twice.
So long as we prefer to finance higher education through personal debt, we need to keep the student loan interest deduction.
Correct me if I'm wrong, but I don't think that the mortgage deduction can ever function as a tax shelter. Interest is a liability, not a capital expenditure. You would always be better off financially with neither the debt nor the deduction. That is part of the reasoning behind it to begin with. While it does incentivize increased debt to some degree, it doesn't incentivize debt you don't need at all.
Wouldn't that make it almost impossible to start a business if you didn't already have a lot of wealth?
(feel free to pm me if you think it is of topic but It seems to me to be included in discussing why personal debt is different than buisiness debt.)
If I pay $10,000 in interest and I make $35,000 a year, I get $1500 back. If I pay $10,000 in interest and I make $400,000 a year, I get $3900 back. Thus, regressive.
"Tax shelter" was not the correct term; I was in a hurry and imprecise. It will incentivize those with the means to take advantage of the tax break while they still can - people buying retirement homes earlier, for example.
What are you calling a tax rebate? I doubt anyone that makes enough to own a home actually gets a tax credit. If you are talking about people getting a refund for overpaying their taxes throughout the year, well, you can get one too if you increase your witholding amount.
Well, I mean, people do, but those people are idiots, so
If you follow the 'standard' method of setting your withholding (1 allowance for me, both state and federal) then homeowners usually get a rebate and renters usually owe more tax. Smart homeowners would probably calculate their interest payments in advance and pay less tax through the year, smart renters can say 'Well, at least I earned extra interest on the money before I gave it to the government' BUT it doesn't change the fact that Bob who owes $3000 a month in rent and earns $100K is effectively making a transfer payment to Jim who owes $3000 a month on his mortgage and earns $150K. Deduct how you want, call it what you like, Bob is helping pay for Jims house. And he's doing so using money that he could otherwise save towards buying his own house.
Why not just introduce a percentage deduction instead of an outright one? Start at 99% and work your way backwards to 0 over the next 100 years.
The tough thing about eliminating the mortgage deduction would be the effect on home values, they would return to their 'real' levels. Good for society and for people who don't own a home, bad for people who do. Even thinking about eliminating it over X years would drive prices down.
It needs to go, but it's VERY hard to get rid of it. I think a limit is the sensible way to go. So you can deduct a maximum of X over the year, where we set X as the same or close to the standard deduction. So if you own a home, and donate to charity etc then it helps you save some money.
Ehh... only because the tax tables are progressive? Your math is double-counting here. A flat tax rate to begin with would fix your problem, and thus it's a bit disingenuous to call this regressive. In fact, we should make the tax brackets regressive, and then the mortgage deduction would be progressive, m i rite?
There is no "get back." If you pay 10,000 in interest and make $35,000 a year, your tax is $3,315: 13.3% of your taxable income, 9.5% of your gross income. If you pay $10,000 in interest and make $400,000 a year, your tax is $113,261: 29% of your taxable income, 28% of your gross income. The latter makes 11 times as much money but pays 34 times as much in taxes. That is not regressive. It is merely "slightly less progressive" than it would be without the deduction.
Right... it might prompt some people who are going ot be taking on debt anyway to take it on sooner rather than later, or at a slightly higher amoint than they would later, but it wouldn't do much to prompt anyone to take on debt that they weren't otherwise planning to take on.
This really isn't the case though.
someone making 35k, with the standard deductions owes $3,915 in federal taxes(13.5%). Going to the mortgage deduction(and how someone making 35k gets a mortgage with that much interest). Grabbing the deduction lowers their bill to 3,315(13.26%), saving them $600 or 15%.
for someone making 400k, it goes from 116,761(29.19%) to 113,261(29.4%); saving them 3500, or 2.9% on their bill.
http://www.moneychimp.com/features/tax_brackets.htm is really good for this crap.
Basically what your saying is ALL deductions are regressive.
Yes, it is good that you understand this fundamental principle of a progressive tax system.
I don't understand what you're saying. If it's only regressive because it's progressive, that doesn't really make any sense. Pretty sure that is a decent argument.
And bad that you are taking such a circuitous path to admitting that calling the deduction "regressive" wasn't a very meaningful statement. If all deductions are regressive, then you aren't really making a point about mortgage deductions. Nevertheless, all we need to do is agree on a consistent mechanism for comparing taxes among different incomes and your point disappears. Generally, the comparison is how the percentage moves in relation to the total. In your example, the $35,000 income got 4.2% of his income reduced from his taxes, while the $400,000 income only got 0.9% reduced from his. Even the deduction is still quite progressively costly in terms of its decreasing relative benefit.
So, percentage-wise, his deduction is over a billion times more than the guy making $35,000, since it is around 4% of his income, versus 0% of the other guy's.
As if it needed further illustrating:
if a rich person loses 3% of his income to taxation it affects basically nothing
if a poorbro in the us (with its incredibly high nondiscretionary spending for lower middle class people) loses 3% it can fuck him in the ass
not that this is directly relevant here
The deduction just increases demand for housing which raises home prices - good for banks and sellers, bad for buyers.
- John Stuart Mill
As to the second, most people who aren't rich who are taking it are donating to churches. I don't feel like the government should be subsidizing religion. And I feel like people who are rich and taking it really don't need it. Also, even for those people, the difference between the standard deduction and what they take by itemizing is going to be very small in comparison with what wealthy people are taking..
As for the other, it isn't just people making charitable donations. Personally, my work related deductions top $15,000. That isn't abnormal for my line of work and is before I even get near my home expenses, so yeah, that mortgage deduction plays a not inconsequential role.
- John Stuart Mill
And I'd bet the average taxpayer in my bracket is taking the standard deduction. That is more or less the point. You may get a deduction that covers you mortgage interest and similar expenses. You are arguing that I should eat those costs because I have other expenses as well.
Another way to put it is, if the standard deduction is what the median homeowner would itemize with mortgage interest, what justifies keeping it that high if you get rid of the interest deduction?
- John Stuart Mill