November 13, 2010

How can they take away the mortgage interest deduction?

It's one of the deficit commission's proposals:
“The mortgage interest deduction is one of the pillars of our national housing policy,” said Michael D. Berman, chairman of the Mortgage Bankers Association. “Limiting its use will have negative repercussions for consumers and home values up and down the housing chain.”...
But:
[O]nly those in the top third of wage earners even itemized their deductions, meaning that two-thirds of taxpayers weren’t eligible for the break.

“No one can make a serious intellectual argument in favor of the mortgage interest deduction,” [said Calvin Johnson, a tax professor at the University of Texas]. “Why should the government subsidize homeowners rather than renters? The only thing it’s good for is middle-class votes.”
Then why did "House Speaker Nancy Pelosi blast[] the commission’s suggestions, saying it would force middle-class homeowners to subsidize tax breaks for the wealthy"? I guess there are a lot of "middle class" people in the top third of taxpayers.

It's a complex policy question, and since there are other, offsetting tax breaks, it's hard to see who will be hurt the most. But generally, isn't it fairer to have lower tax rates than a bunch of deductions? With deductions, they only help if they're more than the standard deduction and if you do the thing the government has decided to favor.

Wouldn't it be better if you made housing decisions — rent or buy, big or small — without the government adding weight to one side? But if you've already bought a house, and the government's encouragement factored into your decision, you might feel cheated if they take that deduction away. Of course, the government always had the power to take the deduction away, and there's always the argument that you should have factored that in when you made your decision.

But that argument is going to piss people off unless they can remain calm long enough to see that a lowering of the tax rates more than offsets the bottom-line value of their deduction. But is that true? Does anyone know?

90 comments:

Anonymous said...

Uh... this money quote from the article:

Its size, popularity and link to the emotionally charged American notion of homeownership has made it so politically sacrosanct that there are serious doubts whether Congress will even entertain the idea.

So, there's no chance that taking away the deduction will happen.

So, what's the point of this discussion?

Yet another endless discussion on a topic that comes up from time to time and hasn't produced a single new idea in decades.

Are there any new ideas in the universe?

And now, out to rake the back yard.

Anonymous said...
This comment has been removed by a blog administrator.
Kevin said...

Somehow the Canadians manage to buy and sell houses without the mortgage interest deduction.

Screw renters! Keep the mortgage interest deduction!

AllenS said...

Not being able to itemize, really limits the deductions you can take. I give a lot of money to a charitable organization every year, because I can't itemize, I can't take the deduction. I'll still give though.

paul a'barge said...

National Sales Tax.

Dump the Income tax.

Everyone would pay at least something.

Argument over.

Hagar said...

It's been some time since it paid for me to itemize my deductions, so for myself I do not care.

Long term, one can argue about whether it is worthwhile to keep the homeowner deduction or not.

However, at the present time, the Government needs to straighten out the mess that Congress has made with their spooky mortgage system before the mortgage holders take another hit.

rhhardin said...

I don't think the deduction helps the wealthy especially. Deductions phase out with income.

It used to be that all interest was a deduction, since it subtracts from income.

It changed when money itself was considered to be consumption, but they preserved the mortgage deduction.

That itself contributed to the mortgage meltdown, because people took out equity loans to put their consumer debt back in the deductible column.

Messing with prices always misallocates resources, which is always a net cost that's never accounted for.

Eliminating the mortgage deduction will itself cause existing house prices to fall, now; since it raises the effective price to the buyer, while simultaneously hamstringing any existing owner who's pressed for payments.

Don't screw with prices.

Lincolntf said...

Please, let the Liberals try to get this done.
It will drive the few remaining non-Socialists in the Democrat Party right to the GOP doorstep. We've got plenty of room and are ready to make more, so come on in.

rhhardin said...

sales tax

You can't move the point of tax collection downstream in the earn-save-spend cycle without taxing existing assets twice.

Today's savings are income on which the income tax has already been paid.

If you replace the income tax with an equivalent sales tax, it taxes the same money again at the same rates, effectively instantly stealing 25% of your savings.

Retirees are not going to like it.

Hagar said...

I would think the primary beneficiaries of the mortgage interest deduction at the present time, are the homeowners with the overpriced houses and underwater mortgages, but however irritated you may be with these people who fell for Barney Frank & Co.'s siren songs, the last thing we need right now is to encourage more bankruptcies, well deserved or not.

Automatic_Wing said...

But generally, isn't it fairer to have lower tax rates than a bunch of deductions?

Yes, fairer and more efficient as deductions cause distortions in the economy. For example, the mortgage interest deduction was one of the factors leading the the housing bubble. By all means do away with it, the government should not be encouraging people to pay interest. It's absurd.

former law student said...

Not even Reagan could eliminate the mortgage interest deduction.

And while the mortgage interest deduction may be immaterial in Sarah Palin's America, if you want to live near a big city, or in Nancy Pelosi's home state, the mortgage interest deduction brings home ownership closer to your reach.

Randy said...

One look at a map of the congressional districts represented by non-minority Democrats might provide an explanation for Nancy Pelosi's response to the idea.

Wouldn't it be better if you made housing decisions — rent or buy, big or small — without the government adding weight to one side?

Yes, and it would eliminate the supposed need for Fannie Mae and Freddie Mac. But political power would be lost, and neither party likes losing political power.

Of course, the government always had the power to take the deduction away, and there's always the argument that you should have factored that in when you made your decision.

True. Nothing lasts forever.

But that argument is going to piss people off unless they can remain calm long enough to see that a lowering of the tax rates more than offsets the bottom-line value of their deduction.

In the current environment, I wouldn't bet on that happening.

But is that true?

For most, probably.

Does anyone know?

Probably not. As they say, The devil is in the details and anything that ultimately passed by Congress and signed by a President is unlikely to closely resemble the proposal in its current form.

Caveat: BWDIK? As always, YMMV.

Unknown said...

Right now, my rule of thumb is - if The Zero, Dingy Harry, and/or Pelosi Galore are against it, there's probably something good about it.

Don't really have a dog in this one since our house is paid for - The Blonde did it by saving every penny (literally) she got her hands on and putting into paying off the mortgage, but raising taxes in a recession is one of those things anybody who didn't attend the Ivy League or works for the Gray Lady seems to know.

shoutingthomas said...

Uh... this money quote from the article:

Its size, popularity and link to the emotionally charged American notion of homeownership has made it so politically sacrosanct that there are serious doubts whether Congress will even entertain the idea.

So, there's no chance that taking away the deduction will happen.


This assumes Bernanke's currency manipulation doesn't turn us into the Weimar Republic.

That said, my other rule of thumb is that a lot of stuff that's been off the table for 65 years is going to come on the table if things get bad enough, which I think they will.

ark said...

I think we should regularize the tax status of interest: Either allow people to deduct interest paid on all loans (as was once the case) or do not treat interest received as income.

The status quo is that interest on many loans is taxed twice: The lender has to pay taxes on the interest received even though the borrower can't deduct the interest paid. The effect of this double taxation is to make credit harder to obtain than it would be otherwise--which I seem to recall was part of what triggered the current economic crisis in the first place.

former law student said...

Everyone would pay at least something.


Not me, assuming there is no tax on food.

If my clothes wear out, I'll hit the garage sales. I know how to make beer and wine.

Come over to my house for an evening of Scrabble and antenna TV. If you don't like beer or wine there will be spearmint tea from the back yard.

Randy said...

if you want to live near a big city, or in Nancy Pelosi's home state, the mortgage interest deduction brings home ownership closer to your reach.

Although I don't disagree with you, has it ever occurred to you that the existence of the deduction is also a significant factor in pricing?

LilyBart said...

It would have been better not to have it in the first place. But we have it now and the deduction is 'priced' into the value of homes. To eliminate it now will cause pain in a sector of the economy that is already on its knees.

For myself, I would be willing to make some sacrifies (higher taxes) if (AND ONLY IF) the government was dedicated to getting our fiscal house in order, and moving toward a smaller, more fiscally repsonsible structure. But its not. It will increase our taxes and continue to spend us into ruin.

Fred4Pres said...

You can argue the pros and cons of it, but I doubt it will be going anytime soon.

We could start cutting by deducing government 5% over all discretionary spending. That saves about 100 billion.

billm99uk said...

Its size, popularity and link to the emotionally charged American notion of home ownership has made it so politically sacrosanct that there are serious doubts whether Congress will even entertain the idea.

So, there's no chance that taking away the deduction will happen.


They said the very same thing about the British equivalent (MIRAS) before its abolition too, though. In the end it went (in April 2000) with little fuss. What they'll probably do is "salami-slice" it. You reduce the gains, but politically it's so much easier....

KCFleming said...

"“Why should the government subsidize homeowners rather than renters?"

Socialists believe all your money actually belongs first to the state, and they get to decide how much you keep. Hence, if you pay a lower tax rate, they think it's a 'subsidy'.

Misty said...

Gault???

Misty said...

Former Law Student - sounds great!

Big Mike said...

Professor, ask yourself a couple of questions.

Question: Where do the people live who write tax policy?

Answer: Washington, DC, or its suburbs.

Question: Name an area of the country which has the highest housing prices?

Answer: There are multiple correct answers, but the Washington, DC, metropolitan is clearly among them.

Question: If we accept the premise of your discussion, namely that only the highest-income people take mortgage deductions, what are incomes like in the Washington, DC, area?

Answer: Per the Census and as reported in Wikipedia six of the top ten and 8 or 9 of the top 14 counties by income are in the Washington metropolitan area (depending on whether you want to include Calvert County -- having lived in Maryland about 15 years ago I wouldn't, but others -- including Wikipedia itself -- disagree with me).

So the net conclusion is that the mortgage deduction will happen someday, but given the way it would have a disproportionate impact on the Washington area, where the legislation is written, it will probably survive this round of austerity measures.

Misty said...

Oh, and by the way, in Arizona, there IS tax on food now. Not sure if it's in all counties/cities, but it is where I am.

Big Mike said...

Meant to write "will go away someday."

TWM said...

When I read this I also noticed that they were talking about raising the standard deduction to $30,000 which is way more than I ever got with my itemized deductions (over twice as much actually), including mortgage interest. So, if that were the case I say go for it, cause I'll be doing better, not worse. I'm assuming though that you folks holding $500,000 to $1,000,000 mortgages would take a big hit. Another reason not to live in California and most other blue states.

Pastafarian said...

Why is it that just about everything that President Wonderful proposes ends up kicking me in the nuts?

The elimination of this deduction would increase my federal tax bill by about $3,000. I have kids, a house, and an above average income, so I itemize.

And even though I'm far from wealthy, if they increase the highest tax rate, this will end up kicking me in the nuts too, as my small business is an S corp. And that small business is just lucky that President Wonderful has magnanimously decided to roll back that 1099 rule that they snuck into healthcare.

It's as if I have a target on my back. Next he'll levy a tax on loincloths and back hair.

Trooper York said...

This is perhaps the worst idea ever to come out of Washington in a long time.

Well since 1986 when they first started the idea of "passive" income. In that bill they changed the classification of rental income or loss to a "passive" category and eliminated or limited the deductibility of rental losses to the ordinary taxpayer.

When I was a baby accountant, I had many clients who had an investment property that they bought and maintained and rented out. Because of depreciation they would have a "paper" loss that gave them a nice little deduction on their tax returns. So it was an incentive for them to buy properties, fix them up and rent them at a reasonable rate. The value of the real estate would go up without it being taxed until they sold it so when they sold it they would generate a tidy little profit. Plus they had the year to year deduction as an inducement to wait for the payoff. This obviously encouraged the small investor and really helped the rental real estate market.

When the passive loss rules came in they basically destroyed that rental loss deduction for anyone who makes more than $150,000 a year. You know the people who actually could invest in real estate. Since the deductions were basically mortgage interest, real estate tax and depreciation it was just a fool’s errand for a small investor to own a rental property. So they stopped buying them. At least in the same volume that they had done previously to 1986.

In my view the way to jump start the housing market is to restore the full deductibility of the rental loss to all taxpayers. That would be an incentive for people of means to invest in rental real estate. It would allow investors to pick up the distressed properties now in foreclosure so they can get a tidy tax deduction. It would lead to more housing and really serve to stabilize the market. Yes there might be marginally less tax revenue but the benefits would far outweigh the costs.

And one last note. In 1986 they eliminated many deductions while lowering the rate. The con was that the lower rate would make up for losing those deductions. Of course a few years later they rasied the rates. Funny how that happened.


The elimination of the mortgage interest deduction would be a disaster of epic proportions.

Unfortunately initiating disasters of epic proportions is what the Obama administration does best.

Sorry for being serious. Now back to more photo essays about Sarah Palin's breasts.

Trooper York said...
This comment has been removed by the author.
TWM said...

"We could start cutting by deducing government 5% over all discretionary spending. That saves about 100 billion."

Sometimes the simplest solutions are the best.

DaveW said...

We've always used tax policy to encourage behaviors we wanted to further national goals.

Deductions for mortgage interest, children, and on and on. When I was in my 20s we still allowed people to deduct interest on consumer debt like credit cards.

Since the Bush tax cuts took so many people completely off the income tax rolls a lot of people (I think it's actually a majority?) don't use the mortgage interest deduction although they may not even realize that.

There are some things about the way we have our tax system set up that are really screwy. The limit on FICA taxes for high earners is positively stupid. Getting rid of the mortgage interest deduction is a good idea, but it's only a start to cleaning up our tax system.

Trooper York said...
This comment has been removed by the author.
Tyrone Slothrop said...

A reinstated tax is never used to reduce the nation's debt load. It is always used to justify increased spending. Increased government spending means decreased personal liberty, Next question?

Trooper York said...

Sorry about the multiple postings.

My computer went crazy.

jungatheart said...

"Former Law Student - sounds great!

Seconded.

Trooper York said...

Hey this might help you if you are depressed about this, just think about the new Congress!

Triangle Man said...

"“Why should the government subsidize homeowners rather than renters?"

As Pogo points out, this is not a subsidy, but it is an incentive. Should the government incentivize homeownership?

Tyrone Slothrop said...

Trooper, you're stuck in the chronosynclastic infundibulum. This happened to me recently-- I feel your pain. Just say no to the "publish your comment" button.

traditionalguy said...

The answer is simplified by using the Dems point of view: "Why should we give the Government's money away" to homeowners...and that is a class of people that has just shrunk to a very small section of voters

MayBee said...

Of course, the government always had the power to take the deduction away, and there's always the argument that you should have factored that in when you made your decision.

What can't we make that argument about?
The government always has the power to raise your tax rate, take away the tax benefits of a 401(k), declare your home to be in a zone better suited for retail space, and make you buy private health insurance.

You should have planned for that, people.

William said...

If an economic proposal favors me, I generally favor that economic proposal and then go on to extrapolate how it benefits all mankind. But I'm confused about this. My mortgage is all paid off so it doesn't seem I have a dog in the fight. On the other hand, in an efficient market, the resale value of my home should decrease by whatever the mortgage deduction is worth. And markets are rarely efficient. This action should increase the downward cascade of home prices..... People whose major asset is depreciating rapidly rarely feel sanguine about the future and this, in turn, dampens spending and investing.....From the viewpoint of narrow self interest, I would, therefore, say it's better to take a pass on this for a few years. Philosophically, it's a potent argument, and those with high principles probably agree with you.

Bender said...

government subsidize homeowners

In what twisted, effed-up way is people keeping their own money a government subsidy?? Its their money, not the governments, not Pelosi's, not Obama's. It is their own money. And government only acquires it by taking it by threat of imprisonment or confiscation.

Randy said...

that is a class of people that has just shrunk to a very small section of voters

Has it? It's well north of 60% last I heard. True, it is down from its unsustainable high at the peak, but that was a big part of the bubble, wasn't it?

Bender said...

"We could start cutting by deducing government 5% over all discretionary spending. That saves about 100 billion."

Sometimes the simplest solutions are the best.


Even simpler is to simply go back to FY2008 spending levels. That saves about $1000 billion.

When Obama came into office, he almost immediately increased the annual budget by one trillion dollars. So, just treat that like a spending bubble. Go back to 2008 levels, and not keep this insane FY2010 baseline.

I'm sure that the world would not end if people were forced to live as if it were 2008 again. In fact, if I remember back to those ancient dark ages, life was a hell of a lot better.

Kevin said...

if you want to live near a big city, or in Nancy Pelosi's home state, the mortgage interest deduction brings home ownership closer to your reach.

LOL. All it does is drive up housing prices by the value of the mortgage interest deduction - leaving houses no more affordable than they were before.

Bender said...

Yes, of course the government should tax the money that is otherwise used to pay mortgage interest.

The government should always have the first bite of your apple, it should always be first in line to enjoy the fruits of your labor. And your living expenses, the money you need to house and clothe and feed you and your family should always come after the government, always.

Who the hell do you think you are, wanting to put your living expenses first? You are a peon, a peasant, a slave -- the government owns your labor, don't you get that by now?

Trooper York said...

If we want to talk about eliminating a deduction, let’s eliminate all these new fangled tuition tax deductions and credits for college educations. We never had them before the last few years. Ae3Too many people go to college who are wasting the taxpayer’s money. There are way too many schools. Why should the government subsidize these crappy colleges that turn out muddle headed idiots who can’t find a job?
Let them go to a trade school and learn something useful like plumbing or taxidermy. Too many people are going to college now. The education industry is the biggest rip-off in the country right now.

former law student said...

All it does is drive up housing prices by the value of the mortgage interest deduction

That implies that California house prices have some basis in reality.

The price of Cupertino homes shot up in the 1990s even though the nervous Hong Kongers were paying cash for their escape routes.

Randy said...

Maybee wrote:
You should have planned for that, people.

Actually, that's true. "What the government gives, the government can always take away" is something to remember. Take advantage of every loophole and benefit now but don't rely on them always being there in the future.

For example, Trooper mentioned the big changes in investment property expense deductions in the late '80's (1986, IIRC). For a short period of time (1982-86 IIRC), purchasers of rental property could depreciate their property over a 15 year period instead of the traditional 30-year time frame.

I'm old enough to remember when all credit interest was deductible, there were no limits on deductible expenses WRT autos used in business, and no limits on mortgage deductions for second homes.

I'm just old enough to remember when my dad had a free company car he could drive anywhere he wanted to, and an expense account, neither of which generated the 1099 (or whatever) both would today.

The tax code is always changing, and usually not for the better. Over the years, I've met more than a few successful people who argued "Take the money, pay the taxes now and don't rely on any promised tax preferences in the future."

FWIW, it isn't hard to find more than one person with a substantial nest egg in a traditional SEP/IRA facing ordinary income tax on withdrawals who wishes they'd paid the tax way back when instead.

P.S. Miss you on twitter.

Randy said...

If we want to talk about eliminating a deduction, let’s eliminate all these new fangled tuition tax deductions and credits for college educations. We never had them before the last few years. Ae3Too many people go to college who are wasting the taxpayer’s money. There are way too many schools. Why should the government subsidize these crappy colleges that turn out muddle headed idiots who can’t find a job?
Let them go to a trade school and learn something useful like plumbing or taxidermy. Too many people are going to college now. The education industry is the biggest rip-off in the country right now.


It would be a start! But far too many voters are counting on it, I imagine.

Bender said...

You folks really are focusing on the wrong things.

The problem is NOT that the people are taxed too little. The people pay trillions of dollars in taxes each year. That is PLENTY enough money for any sensible and just government to get by on.

And all you social justice types out there, who bemoan all the evil rich out there? By far the richest entity out there is government -- it is government which is the robber baron.

The problem is not the people, and paying more money to the government is not the solution.

Goverment is not the solution. Government is the problem.

Hagar said...

I think the home mortgage deduction came about at the end of WWII, when the Gov't wanted G.I. Joe and Rosie the Riveter to get married and raise children, which would take Rosie out of the labor market so that Joe could get her job, and at the same time they established the FHA to loan them the money, which would prime the construction industry, and it also was a way to put large amounts of money into circulation, which I think the Federal Reserve at that time lacked the power to do.

None of these conditions exist, but the programs roll on.

I believe all "directed" tax breaks and other monetary policies distort the market place and are mischievous in the long run. However, at the moment, the primary urgency is to straighten up the Fannie Mae/Freddie Mac-Countrywide mess.

Dust Bunny Queen said...

When I read this I also noticed that they were talking about raising the standard deduction to $30,000 which is way more than I ever got with my itemized deductions

Eliminating the mortgage deduction AND replacing it with a higher standard deduction is not a bad idea. Most people don't have the ability to itemize deductions and lose any benefit of a mortgage deduction.

They should also do something about the floor on being able to deduct medical expenses. Many people even IF they itemize cannot take much of a deduction because the floor/percentage is rather high compared to income.

You may deduct only the amount by which your total medical care expenses for the year exceed 7.5% of your adjusted gross income. You do this calculation on Form 1040 Schedule A in computing the amount deductible.

It would be beneficial to everyone to simplify the tax code and remove many of the tax credits and deductions and just increase the standard deduction and personal exemptions. Well, except for tax preparers and financial planners :-D

Dust Bunny Queen said...

it isn't hard to find more than one person with a substantial nest egg in a traditional SEP/IRA facing ordinary income tax on withdrawals who wishes they'd paid the tax way back when instead.

Roth IRA

Randy said...

Roth IRA

Yep. Once it became available it was a better vehicle but too late for some. And only good until its eliminated in the search for $ at some date in the future.

Innovation rules said...

Get rid of the marriage penalty. That is job 1.

Mortgage deduction is a huge deal for me. If they drop the tax rate though, no biggy.

former law student said...

It would be beneficial to everyone to simplify the tax code and remove many of the tax credits and deductions and just increase the standard deduction and personal exemptions.

Tax simplification happened during the Reagan presidency, and immediately things got complicated again.

The worst thing that came out of it, as already mentioned, was people's shift to use their house as a piggy bank -- for cars, mostly -- in order to be able to turn their nondeductible consumer loans into mortgage deductions. HELOCS are evil as far as I'm concerned.

former law student said...

Get rid of the marriage penalty. That is job 1.


Which marriage penalty? The one that affects single income couples or the one that affects two income couples?

Michael Haz said...

What mortgage deduction? It is a fiction that there is a mortgage interest deduction, at least for the majority of taxpayers.

Lower income taxpayers don't file itemized returns; middle and upper income taxpayers lose the deduction via the AMT scam.

MadisonMan said...

It probably saves me money, but I'm not that attached to it, the mortgage deduction. It would spur me to pay off the house sooner, which is a good thing.

If it's not accompanied by a big cut in spending, however, no way. I'm not sending more money to DC so bureaucrats can have jobs.

BJM said...

The one thing I've learned in the past two years is to watch the administration's other hand.

While we're distracted by RE interest deduction, which congress has no appetite for repealing, the Alternative Minimum Tax patch expires 12/31/2010.

Congress left for the election campaign season without addressing the AMT patch, knowing that the deadline for printing the 2011 tax schedules would pass before they sat again this year. The new schedules include the AMT, which is going to catch millions of middle class and working families by surprise.

However they did address the volume levels for TV ads.

MadisonMan said...

So the feds can have my mortgage interest deduction.

In return, I'd like the Dept of Education and the Dept of Homeland Security, and maybe the TSA, shut down.

Seems like a fair trade to me.

Randy said...

Seems like a fair trade to me.

Me, too. But we're a minority.

Lisa said...

I think the bigger problem is that many people will have to change their deductions for their pay if the mortgage interest deduction goes away.

Their pay will go down... perhaps significantly.

They may find it difficult to afford their house now... especially if it is underwater.

They may be more inclined to walk away.

I think this will significantly hurt housing which is already a disaster right now.

Not smart policy.

former law student said...

We're currently spending 4.7$ of GDP on the military, while the EU standard is 2%. Thus we could cut defense spending in half.

Lisa said...

Oh and Ann, we did the math. We would see an increase of $14,000 in our taxes.

a psychiatrist who learned from veterans said...

The interest deduction is part of the spend your way to prosperity tool kit. The other part of the tool kit is regulate, explicitly direct. Obama presented his trade imbalances ideas limitation at the G20, a part of the latter tool kit application. They told him, 'Forget it, Yank.' I think the Republican Congress is going to look away from these ideas also.

TWM said...

"We're currently spending 4.7$ of GDP on the military, while the EU standard is 2%. Thus we could cut defense spending in half."

And have a military with the capability of the various militaries in the EU?

Yeah, that's the ticket . . .

Randy said...

The interest deduction is part of the spend your way to prosperity tool kit.

True. In the final analysis, it is just another government subsidy (hand-out), but it buys off millions of voters in the process.

Roger J. said...

FLS raises an interesting point vis a vis comparing EU military versus US--Of course the EU relies in large part on the US Military for its security, thus they have no incentive to raise their military expenditures.

Clearly there is waste in the US military budget--abolish most of the unified commands and focus on the ability of a single command to deploy forces to trouble spots that may develop--the decision being made on the threat to our national interest.

Also re military costs--last I looked over 60% of military costs were for personnel. Can we do the job with fewer miliary forces? I believe we can--but the other reality our fiscal issues are not with the size of the military, but in the entitlement programs.

Michael said...

Trooper York brings up the sore subject of the 1986 tax revisions in which the conservative darling Reagan retroactively rescinded the tax benefits of thousands of investors who had been encouraged by the tax code to invest in real estate. Never, ever, trust the government to be fair including, or especially, when they are "trying" to be.

BJM said...

@TRIO

Exactly, the only reason they can spend so little on defense
is because they shelter under our umbrella.

In private Europeans will tell you that they prefer NATO to a re-armed Germany.

Michael said...

Be very careful in responding to statistics provided by FLS. Many, if not all, are derived from zfacts or wiki. He is a master of the cut and paste and believes that a pithy factoid is an excellent substitute for thought.

Roger J. said...

I served on the NATO staff back in the 1980s--at the time NATO was often referred to as "Needs Americans (or alcohol) to Operate.

The reforms of the Joint Chiefs of Staff system did much to eliminate the parcholiam that pervaded the US Military--we got the command and control better, but did not fix larger problems.

X said...

The mortgage interest deduction levels the real estate playing field for homeowners vs. investors (rental property owners) and renters.

Your landlord gets a mortgage interest deduction that results in lower rent than otherwise, so renters get the benefit too, just indirectly, the same way property taxes are paid by renters.

avwh said...

"And one last note. In 1986 they eliminated many deductions while lowering the rate. The con was that the lower rate would make up for losing those deductions. Of course a few years later they rasied the rates. Funny how that happened."

That's exactly what I thought of while reading this proposal.

ddh said...

“No one can make a serious intellectual argument in favor of the mortgage interest deduction,” [said Calvin Johnson, a tax professor at the University of Texas]. “Why should the government subsidize homeowners rather than renters? The only thing it’s good for is middle-class votes.”

Did anyone see that Prof. Johnson is really saying that no one can make a serious argument for the mortgage interest deduction that he would favor? Because the deduction does in fact subsidize one type of activity (taking out home mortgages) at the expense of other activities (renting), he's saying it's immoral. But isn't that argument an attack on all tax incentives? Somehow, the professor's comments about buying middle class votes make me think he prefers a different set of deductions and credits instead of a flat income tax or a consumption tax.

Congress wrote the deduction into the tax code to make home ownership more affordable for the middle class and to encourage more people to enter the middle class, which it thought would increase society's sense of well-being. Favoring middle class values used to be a good thing, but Johnson sounds as if he was sneering.

Bruce Hayden said...

We're currently spending 4.7$ of GDP on the military, while the EU standard is 2%. Thus we could cut defense spending in half.

Can the military be run for less? Maybe. Can we cut a significant number of personnel? Likely not. A large percentage of the military was dumped under Clinton for his Peace Dividend. But, then we tried to fight in Iraq and Afghanistan and found that we had cut too much.

Libs might say that if we just were less confrontational and was nice to all the bad people in the world, that we wouldn't need as much military as we have. But, that isn't the way that the world works, and we have again discovered the cost of having wishful thinking libs in charge of our foreign policy. Ask yourself, which of our foreign allies are we closer too now than two years ago, and which of our enemies is respecting us more?

Oh, and please, let's not just look at the percentage of GDP goes to our military now, let's also look at it historically. It isn't the military that has been growing as a percentage of GDP, but rather, everything else. They have actually shrunk. And, let me suggest that national defense is, and always has been, one of the core Constitutional duties of our federal government. Not Social Security. Not Medicare, ObamaCare, TARP, Porkulus Keynesian spending bills.

john said...

"Keep your g*dd**n guvmint hands off my entitlements!"

Scratch away at a tea party conservative and you find a ... republican.

lucid said...

Althouse asks:

"[will} a lowering of the tax rates more than offsets the bottom-line value of their deduction[?]"

Are you kidding? this is a commission to fix the deficit--nothing they do with taxes is goig to save you money. What they do to cut spending might save you money.

If they drop or phase out the mortgage deduction, every home with a mortgage (house, condo, coop) immediately becomes worth 15 to 20% less. BUT YOUR MORTGAGE STAYS THE SAME.

Many, many more mortgages would immediately go under water. Current owners would be disadvantaged compared to first time buyers. Foreclosures would increase. Everyone who is using their house as a form of savings for retirement would immediately take a 20% hit.

Bank balance sheets would take a major hit as the value of the property underlying their mortgages declined. It would be a new Collateralized Debt Obligation
crisis.

It would be a disaster.

Isn't this obvious?

lucid said...

Althouse asks:

"[will} a lowering of the tax rates more than offset the bottom-line value of their deduction[?]"

Are you kidding? This is a commission to fix the deficit--nothing they do with taxes is going to save you money. What they do to cut spending just might possibly save you money.

If they drop or phase out the mortgage deduction, every home with a mortgage (house, condo, coop) immediately becomes worth 15 to 20% less. BUT YOUR MORTGAGE STAYS THE SAME. If you have a mortgage, you just will have borrowed 15-20% of the value of your home without getting anything in return.

Many, many more mortgages would immediately go under water.

Foreclosures would increase.

Everyone who is using their house as a form of savings for retirement would immediately take a 20% hit.

Bank balance sheets would take a major hit as the value of the property underlying their mortgages declined. It would be a new Collateralized Debt Obligation
crisis.

It would be a disaster.

Isn't this obvious?

cubanbob said...

Roll back the government budget to 2004 spending, eliminate the subsidies and kick off welfare any able bodied adult who has been on it for more than 5 years.
Consider the rollbacks a targeted tax hike for those who are living off the taxpayers. And while we are it, eliminate the non-profit tax exempt and charitable contribution status for any non-religeous organization that provides services that can be done by a for profit entity.

Taxes are supposed to be a means of raising revenue for government and not a means of social engineering or for stealth funding projects that legislators don't have the guts to vote for publicly.

marklewin said...

But that argument is going to piss people off unless they can remain calm long enough to see that a lowering of the tax rates more than offsets the bottom-line value of their deduction.

I am sure that any takeaway under any circumstance will 'piss people off'. However, I like Governer Christie's perspective. He believes that people can deal with cuts if they believe that they are fair and are being shared equally across the board, rich, middle class, and poor, weak and strong, alike. Unfortunately, whether real or not, the perception is that the the tax code (and the economic system and the law as practiced, for that matter) generally favor the most powerful and priviledged or certain racial or ethnic groups.

To me a flat tax seems fairer than the convoluted, and infinitely complex tax code that is currently in place. I own a home, I itemize, and I have no problem seeing it go away. For that matter, I would also like to see the health insurance deduction for large corporation be eliminated so that we can either purchase healthcare or insurance like we purchase other forms of insurance. As an individual and small business owner my health insurance policy is expensive and basically covers next to nothing. I work as hard as those employed by large organizations (be they the University of Wisconsin, Federal Express, or the Federal Government). The economic playing field of healthcare is tilted so far in favor of big corporations, followed by those who are eligible for state or federal healthcare programs. BTW, Even if you do work for a large employer, it is the employer that chooses the health plan or plans from which, you the employee, must select.

I guess it's pick your poison, do you want to be screwed by the feds or by big business.

Charlie Martin said...

But that argument is going to piss people off unless they can remain calm long enough to see that a lowering of the tax rates more than offsets the bottom-line value of their deduction. But is that true? Does anyone know?

Only people who can multiply.

Randy said...

kick off welfare any able bodied adult who has been on it for more than 5 years.

Huh? I thought they did that more than a decade ago, and that there's been a lifetime cap in place since then. BWDIK? I've definitely been wrong before.

Revenant said...

Call me selfish, but I'll vote against anyone who favors removing the mortgage interest deduction. I don't really feel like having my taxes go up by a thousands of dollars a year.

Ankur said...

The mortgage deduction is very valuable to me.

However, when I calculated my effective tax rates using all the usual deductions I use, it was a little higher than the tax rate my wife and I would fall into under this plan.

So, for our family, it would be beneficial. Also, I wouldn't have to pay top dollar to a tax accountant every year (I try turbo-tax every year to see if I can find any way to beat their deductions, but the darn accountants ALWAYS win - and by enough margin to make their fees worth it)

I have no doubt, however, that it will be exactly the opposite for some people. Still, I think the taxation levels can be fine tuned to minimize impact - but the benefit of a simple tax code would be huge (as long as you don't count the sudden small business losses being claimed by tax accountants across the nation)

MarkW said...

The other important effect of eliminating the mortgage interest deduction would be to further reduce the value of houses. This would disproportionately affect places where housing prices and incomes are high and, consequently, the mortgage-interest deduction is worth a lot...probably no place would be more affected than Pelosi's San Fransisco district.

former law student said...

And, let me suggest that national defense is, and always has been, one of the core Constitutional duties of our federal government.

National defense, yes. This could be accomplished by training and disciplining the militia, as the Constitution dictates, and as works so well in Switzerland and Singapore.

But our role as the world's policeman goes back only to the end of WW II. It defies the Constitutional prohibition of standing armies. Like most things government takes on, it persists long after the need has gone.