Mortgage Interest Deduction
The President’s Advisory Panel on Federal Tax Reform is suggesting reductions in the mortgage interest deduction for some homeowners.
But earlier this month, President Bush’s Advisory Panel on Federal Tax Reform made recommendations, to eliminate this deduction for persons paying interest on larger mortgages, possibly those exceeding $250,000 to $350,000. At the Panel’s final meeting on October 17 the limit was set at $313,000, the current maximum limit for Federal Housing Administration loan guarantees, an FHA amount that varies by location. The panel has also recommended the elimination of the deduction for residential property taxes.–emphasis in the original
Now my reading of this paragraph leaves me really cold to this idea and is one more reason why Bush is just doing a rotten job on the domestic front. I live in California, and not in an expensive neighborhood along the coast such as Laguna Nigel, Orange County. And with the recent run up in housing prices even buying my current house with 20% down would put me into the lower end of the range being considered for capping mortgage interest deductions, and we aren’t talking a big house either or even a new house. So this kind of thing, without some sort of area adjustment accounting for differences in the cost of living would be ridiculously unfair.
Moreover, the reasons for this kind of tax hike (apparently renegging on promises not to raise taxes seems to be a problem with the Bush family) are pathetic.
- Limiting the deduction would provide much needed revenue to the U.S. Treasury to help meet the growing deficit caused by other tax cuts, the war in Iraq, and the looming costs of recovery from the Gulf hurricanes.
- The current mortgage interest deduction encourages people take on added debt, sometimes only in order to spend more on consumption such as enabled by home equity loans.
- The deduction discriminates against renters and even against those with lower rates of mortgage indebtedness; and, as currently structured, it is merely another tax benefit fully available only to those with the means necessary to buy a home requiring a $1 million mortgage.
- Such a change would allow the government a mechanism to slow down a runaway situation which is pricing millions out of the housing market. This argument holds that the only other mechanism currently available, raising short term interest rates, has failed to stop or even slow down rising house prices.
Taking each one in order my responses would be,
- The deficit while not completely the result of President Bush’s spending it sure is a big component. Scrapping Bush’s prescription drug for the elderly blackhole would also be a sensible place to address concerns about the deficit.
- There might be good reasons people are using home equity loans to maintain consumption levels. This kind of reason is arrogant and presumptuous.
- This just an outright lie if the caps apply to people with mortgages of $250,000 or more. Of course, that paragraph isn’t clear whether the $250,000 refers to the size of the mortgage or the interest deduction.
- The mortgage deduction has been around for quite some time, it is unlikely that the current run up in housing prices is due to the deduction, but is instead a function of the historically low interest rates, and as such is completely misleading.
Further, this kind of a policy change would likely have a big impact on the contruction industry and its ancillary industries.
Hopefully President Bush wont agree to such a recommendation and will somehow find the spine to resist spending. I didn’t realize that almost one year ago I was voting for the big government, big spending, liberal candidate. Guess I was wrong. Next election…I’m voting for Lyndon LaRouche, at least I’ll know what I’m voting for.
Update: I’m also going to try and nail down whether that $250,000 applies to the mortgage or the interest payments.
Update II: Okay, the $250,000 figure refers to the size of the mortgage. With such a lower floor, if it applied in California, you’d find that modest houses in some areas would no longer get the full mortgage interest deduction.
Further, this part of the proposal is actually anti-savings, IMO. Many people look at their house as a major asset when they retire. By removing the mortgage interest deduction it makes home ownership look less desirable than it currently is. Hence less home ownership, and for savings to remain the same we’d have to assume that people would take up the difference with increased personal savings/retirement. I think that is a bit overly optimistic.
Also, there are other things that really don’t do much for many people. For example, the ability to pay for health insurance with pre-tax dollars. Big deal, I already get that with my current employer. Nothing there for me. Overall this is about as impressive as a bucket of spit.
Update III: I’d also like to point to Arnold Kling’s article on Bleeding-Heart Libertarianism.
The conventional wisdom is that the intent of the Welfare State is to reduce the disparity between the unfortunate and the well-off. The Welfare State supposedly redistributes income and reduces poverty. In fact, I believe that the Welfare State redistributes poverty and reduces income.–emphasis in the original
Which the current reform proposals will continue. Lets face it, for government perpetuating poverty and misery is what keeps them in their jobs. Very, very rare is the government agency that actually fixes a problem and then close up shop and zero out their budget.
Related Posts: Tax Overhaul Commission Reports