Friday, June 11, 2010

Mortgage deduction

Several folks are already talking about this, including Aretae and dispatches from TJICistan, but apparently the Obama folks are working to end the Mortgage Tax deduction.

EDIT: looks like it has hit Volokh as well.

A Libertarian is naturally conflicted: any way to get out of taxes is good, but any government enforced distortion of the marketplace is bad.

My first instinct is to say anything to get out of taxes = good. My second instinct is to say we need to completely reform the system and remove any and all social engineering from the taxation system.

So going on the Blind Pigs and Acorns theory, I'm going to go along with the administration on this one. (for naturally completely different reasons)

The reason is it is horribly distortive. It forms an incentive to stay in debt, rather than pay off ones property, and was a contributing factor to the housing bubble.

The Mortgage Deduction originally started out as a deduction on all interest. At some point (under Reagan?) it became a deduction only for mortgage interest.

The reason I say that it's horribly distortive and encourages people to stay in debt is that in order to take advantage of the deduction, you have to have a lot of mortgage debt. Consider, for the past 10 years rates have been consistently under 7%, currently they are under 5%. (a 15 year was 4.2% this morning)

You can only take the deduction if you itemize. It's only worth itemizing if your itemized deductions exceed your standard deduction. The standard deduction is around $14K. Thus the only people for whom it is even worth it to itemize are those who have borrowed a quarter million plus, or those who have another reason to itemize such as huge medical bills.

Say you are in the 30% bracket with a note at 6%. Borrowing $233,000 gives you zero additional deduction. Borrowing $350,000 would give you a savings of $2100 over your standard deduction.

Nevertheless, I constantly run into people who think it's a good idea to send the bank $21,000 to save $2100. As far as I am concerned that means that you have failed math forever.

I think I took the deduction once, and only in the first year of my mortgage, when you can also deduct the fees. After that, my standard deduction was higher, so it wasn't worth it.

As for tax schemes in general, the huge problem with any sort of consumption or "fair" tax is that it is tremendously inflationary. Anyone who has any sort of savings or investments is going to get taxed a second time. My cynical side says that this means it's inevitable as it is a great way for the government to double tax all those investment accounts out there.

Ideally I'd like to see a flat income tax, no withholding. No goofy "rebates". No withholding. withholding makes it too easy to ignore. I want everyone to feel the pain of writing that check every year. And if it's too painful...

If that is undoable politically (the flat say 15% on all income) I'd be willing to compromise. The compromise would be flat tax on everything above $XX, where XX is the federal poverty level.

Besides, There's small profit, in robbing the poor...

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