Tax Reform You Can Believe In, Part II
by Richard
Now that we’ve solved the dilemma of funding universal health care, let’s move on to remedy another gaping hole in the tax collecting bucket.
The real estate lobby has enshrined residential real estate as the most sacred and untouchable of all exemptions and deductions.
Some actually make sense to me. Of course, real estate taxes should be deductible, otherwise it would represent an intolerable burden of uneven taxation.
And the current $8,000 tax credit for first time buyers is the only example of bailout spending I have seen that is targeted to achieve the biggest bang for the buck, and is matched to sync up with the trough of the recession.
But then come the truly excessive giveaways.
Most egregious of all, is the deduction for home mortgage interest. Which is truly welfare for the rich.
Let’s do the math:
The average single family home price nationally has fallen to approximately $160,000. Assuming high leverage (a new FHA loan, for example), plan on a new mortgage of $150,000, at 5.5%. That would be $8,250 in interest the first year, a number that steadily decreases as the mortgage amortizes, and principal payments steadily increase.
Yet the standard deduction for a married couple filing jointly is $11,400 in 2009. So the interest deduction is wasted…even a renting couple can claim the full $11,400.
It’s a different story for the jumbo loan on the McMansion.
They could easily rack up $30,000 or more in deductible interest, a subsidy born in large measure by the moderate income families who could not benefit from deductions in excess of the standard deduction.
Which is why we are grossly over-housed as a nation. Housing is, after all, a consumption expenditure, that does nothing to increase savings or productivity.
The error is compounded, when we allow up to $1 million in acquisition indebtedness to qualify for the interest deduction on not just the primary home, but also the second, vacation home.
They say we have the governance we deserve in a democracy, which is pretty depressing as philosophies go.
I suppose that means we have the tax code we deserve in a flawed democracy, cravenly beholden to powerful special interest groups and lobbies.
We are both addicted to and addled by our love affair with consumption.
Eating too much food, consuming too much energy, driving extravagantly wasteful urban assault vehicles, and living in housing several orders of magnitude larger than what would be prudent.
And being goaded and prodded by tax incentives to facilitate such overconsumption.
To assuage our guilt.
Why not? It’s deductible…right?
June 30th, 2009 at 10:24 am
Well said.
It reminds me that one of the ways to tell a good realtor from a bad one is what they tell you about your mortgage:
… some will say that your payments are deductible (a falsehood, but to the extent that first year payments are mostly interest, it is not too far from the truth… still, it’s intentionally deceiving),
… others will say the interest is deductible (true, but as Richard said, it is an itemized deduction),
… a handful will point out the real facts as Richard did, and
… maybe a rare standout will encourage you to get a lower priced home, help you bargain down the price, and minimize your borrowing costs (by maximizing your downpayment) — even if that reduces their own commission.
Then again, that last guy has probably given up on the realtor lobby altogether and joined a non-profit.