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Post by Christine on Dec 25, 2017 22:19:22 GMT -5
So how is the mortgage exemption, which reduces taxes for those wealthy enough to own property, progressive? How does it distribute taxation in a more equitable manner? The same questions should be asked of the adoption tax credit. Let's understand what's going on here, not just believe in the good intentions of the ruling class. Just to be all technical and stuff... itemized deductions, including the mortgage interest deduction, are mostly phased out at higher AGI levels (approximately $313,000 AGI). Similarly, the adoption credit is phased out for MAGI over about $200,000. Not that those income levels aren't still pretty high, but the wealthiest* (more specifically, the highest income earners) can't take them. Also, the AMT calculation adds back certain deductions and calculates tax at a different amount/rate -- if the AMT exceeds regular tax, the taxpayer pays the difference. It's also worth noting that the wealthiest people tend not to take out mortgages. So in that regard, wealthy people getting a benefit from mortgage interest is kind of a moot point. *My objections to the tax code have more to do with income as the taxable base, while wealth is disregarded. A multi-millionaire can make a couple hundred thousand a year in dividends and capital gains, which are taxed at preferential rates (those preferential rates being another objection, as they are not phased out), and still take advantage of itemized deductions and tax credits (though the AMT somewhat mitigates the benefit of the deductions). So, I can somewhat agree with Don in principle, but not necessarily in the specifics. I also agree with the unintended consequences part. ETA: all of the above does not account for the new tax code, which, while putting a few bucks back into the pockets of the majority of the middle class, is far and away more advantageous for the the wealthy. E.g., the AMT exemption amount is doubled -- far fewer people will pay AMT. The doubling of the estate tax exemption, obviously. The top rate on individual income tax is lowered by about 3%. The restriction of itemized deductions ($10,000 cap for state tax, limit of interest for mortgages over $750,000) largely doesn't affect the wealthy (see above). Then on top of all of that, there are new rules which provide deductions for pass-through income. It's complicated, but I'll just throw out that it's a very beneficial situation for owners of, oh, I dunno, maybe, real estate, for example. The new tax code is exceedingly less progressive than the prior one. (Shocker.)
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Post by Don on Dec 26, 2017 6:03:09 GMT -5
In vast swaths of fly-over country, a $313,000 MAGI covers 99.99% of the buyers. So, for market purposes, the limit is meaningless. And those aren't the people competing in the market for "working-class" housing anyway. So prices in the "working-class" housing market are already adjusted, upward, to account for the tax benefit that the buyers have already had beat into their head as a financial benefit.
So buyers today pay more for the house than what would be the market price without that benefit, give more interest to the banks, and save only a fraction of that interest in taxes. The "benefit" of the tax credit accrues primarily tp a) banks, who collect more interest over a longer period of time, and b), real estate companies, which collect their 6% on a larger base than if the exemption didn't exist. All sellers were once buyers, so they're not really benefiting unless market mania has pushed the price up, IN REAL DOLLARS, not in inflated dollars that would still buy the same basket of goods as when they bought the house they are now selling.
The impact on housing affordability for the working class is at best a wash, made far more risky thanks to the bubble mentality people take toward buying a residence and the market volatility introduced by so many putting all their investment eggs in one basket. Worst case, as we've seen, millions have their life savings wiped out because they believed the fiction that one's home should be one's primary investment.
In what way does that compute to "making homes more affordable for the working class?"
Oh, and let's not lose sight of Amadan's points about taxation; it should be progressive and contribute to more equitable wealth distribution. Two more tests failed by the mortgage deduction scheme.
Since we're focused on the mortgage deduction, the increases in housing prices caused by zoning restrictions, easy-money policies, and barriers to anything but labor-intensive, stick-and-brick construction really don't factor in, except as further confirmation that anyone who thinks government policies have made housing more affordable for the working class must be smoking some really good stuff.
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Post by robeiae on Dec 26, 2017 8:58:11 GMT -5
So buyers today pay more for the house than what would be the market price without that benefit, give more interest to the banks, and save only a fraction of that interest in taxes. The "benefit" of the tax credit accrues primarily tp a) banks, who collect more interest over a longer period of time, and b), real estate companies, which collect their 6% on a larger base than if the exemption didn't exist. All sellers were once buyers, so they're not really benefiting unless market mania has pushed the price up, IN REAL DOLLARS, not in inflated dollars that would still buy the same basket of goods as when they bought the house they are now selling. Exactly. The mortgage interest deduction benefits the wealthy end of society, along with banks and people in the housing industry. It's not a boon to middle and lower income classes at all. It never has been, imo.
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Post by Christine on Dec 27, 2017 20:10:10 GMT -5
In vast swaths of fly-over country, a $313,000 MAGI covers 99.99% of the buyers. I'll assume that's true, but it doesn't mean that no one in fly-over country benefits from the MID. (Also just to note that historically, when interest rates were higher, more people benefited. Looking at it "right now" in terms of who benefits is fine, but criticizing the fact that the MID was kept in the tax code years ago requires that consideration, I think.) The ability to take the MID largely has to do with property values, to be sure. But like Cass noted upthread, in some places, property values are much higher than others, and that is relevant to the discussion. If a married couple in fly-over country buys a house that costs $150,000 and takes out a 30-year mortgage, chances are they won't itemize, since their annual interest and property taxes won't exceed the standard deduction. If a married couple in New Jersey buys a similar house that costs $400,000, and takes out a 30-year mortgage, they'll likely itemize, because the cost of the home is higher, and the property taxes are higher. These couples also likely won't have the same amount of income. Which means they won't be taxed at the same rates. Say the fly-over country couple makes $50,000 a year and has a 10% federal income tax bracket. Say the New Jersey couple makes $200,000 a year and has a 25% federal income tax bracket. In this scenario, it's totally fair for the second couple to be able itemize the costs of their "more expensive" home. Granted, this isn't the case when we're talking about two couples in the same state/county, or couples in the same tax bracket where one chooses to buy a more expensive house and the other chooses to be frugal. But I think a big part of the inequality here is that federal tax code has never accounted for the costs of living in different areas. Allowing the deductions has helped to close the gap. (Unfortunately, with the new tax code, not so much anymore.) My point about the $313,000 AGI limit is that it does exist. It is "progressive" at least in that the wealthiest are excluded from taking most of these deductions. I said in my post that the limit is admittedly high. The variation of circumstances in real economic terms, i.e., depending upon where the taxpayer lives, could be an explanation for why the limit is high. And also, since we have progressive tax rates, allowing similar deductions, to an extent, in calculating taxable income, doesn't seem illogical to me. The good news with the new tax code for those folks in fly-over country with $150,000 mortgages is that they'll get a few hundred more bucks--in many cases, several hundred more--back in taxes in 2018. This was well-played by Congress/Trump. I'm sure that money will indeed seem like a "boon," while for the folks who live in high-tax states/areas and who aren't wealthy, it will be that wash Don speaks of, at best.
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Post by Don on Dec 27, 2017 22:55:46 GMT -5
In vast swaths of fly-over country, a $313,000 MAGI covers 99.99% of the buyers. I'll assume that's true, but it doesn't mean that no one in fly-over country benefits from the MID. (Also just to note that historically, when interest rates were higher, more people benefited. Looking at it "right now" in terms of who benefits is fine, but criticizing the fact that the MID was kept in the tax code years ago requires that consideration, I think.) The ability to take the MID largely has to do with property values, to be sure. But like Cass noted upthread, in some places, property values are much higher than others, and that is relevant to the discussion. If a married couple in fly-over country buys a house that costs $150,000 and takes out a 30-year mortgage, chances are they won't itemize, since their annual interest and property taxes won't exceed the standard deduction. If a married couple in New Jersey buys a similar house that costs $400,000, and takes out a 30-year mortgage, they'll likely itemize, because the cost of the home is higher, and the property taxes are higher. These couples also likely won't have the same amount of income. Which means they won't be taxed at the same rates. Say the fly-over country couple makes $50,000 a year and has a 10% federal income tax bracket. Say the New Jersey couple makes $200,000 a year and has a 25% federal income tax bracket. In this scenario, it's totally fair for the second couple to be able itemize the costs of their "more expensive" home. Granted, this isn't the case when we're talking about two couples in the same state/county, or couples in the same tax bracket where one chooses to buy a more expensive house and the other chooses to be frugal. But I think a big part of the inequality here is that federal tax code has never accounted for the costs of living in different areas. Allowing the deductions has helped to close the gap. (Unfortunately, with the new tax code, not so much anymore.) My point about the $313,000 AGI limit is that it does exist. It is "progressive" at least in that the wealthiest are excluded from taking most of these deductions. I said in my post that the limit is admittedly high. The variation of circumstances in real economic terms, i.e., depending upon where the taxpayer lives, could be an explanation for why the limit is high. And also, since we have progressive tax rates, allowing similar deductions, to an extent, in calculating taxable income, doesn't seem illogical to me. The good news with the new tax code for those folks in fly-over country with $150,000 mortgages is that they'll get a few hundred more bucks--in many cases, several hundred more--back in taxes in 2018. This was well-played by Congress/Trump. I'm sure that money will indeed seem like a "boon," while for the folks who live in high-tax states/areas and who aren't wealthy, it will be that wash Don speaks of, at best. That's all very informative, but my next sentence, and all that follows, still applies. The two examples you gave are in two entirely different markets. There is no national market for real estate, only thousands of local ones. Of course, some people are going to benefit from any market distortion, and others are going to lose because of the same distortion. That's what makes it a distortion. You can't determine the health of a forest by examining a couple of trees. And as I pointed out earlier, the fact that property values are so much higher in some parts of the country than in others is precisely why the $313,000 cap is essentially meaningless, except in a subset of markets at the very top of that range. Look at the forest, not the individual trees. Not to mention that you've clearly described a political benefit for the New Jersey couple, being paid for by the couple living in fly-over country. Now, about tho "progressive" impact of the deduction. Note that being in a higher tax bracket means that the deduction saves more in taxes, as you pointed out. Your NJ couple gets a 25% break, while the fly-over couple that makes a lot less money saves only 10% on their taxes. How is that "progressive?" You mostly got it right about the new tax code benefiting current owners by a few hundred dollars a year. But remember that break is now common knowledge, and accountants and tax lawyers are already letting their clients know how this impacts the NEXT purchase those clients are going to make. Market prices for real estate are already adjusting for the new tax situation. There's no long-term benefit to anyone here; prices will adjust upward to neutralize the tax break. End result the same as described before, Housing prices will increase a bit, banks and realtors will make more money, and those working class families this is supposed to help are going to be paying higher prices to buy a house than they would have otherwise. There's nothing here that changes the overall impact of the mortgage deduction, which rob described so succinctly to sum up my long expositions. Benefits accrue primarily to those with the wealth to take advantage of it, and to the institutions that can always be counted on to spearhead any opposition to dismantling the facade. I've explained it in detail, and nothing you said here changes the reality. The MID clearly does not benefit those it's claimed to benefit. Market adjustments naturally take the MID into account and prices adjust accordingly. As rob is so fond of pointing out, incentives matter.
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Post by Amadan on Dec 28, 2017 10:01:04 GMT -5
Now, about tho "progressive" impact of the deduction. Note that being in a higher tax bracket means that the deduction saves more in taxes, as you pointed out. Your NJ couple gets a 25% break, while the fly-over couple that makes a lot less money saves only 10% on their taxes. How is that "progressive?" The NJ couple doesn't get a 25% break vs a 10% break to the flyover couple on their entire taxes - any deduction for someone in a higher tax bracket will count for more net dollars than a deduction of the same dollar amount for someone in a lower tax bracket. That's like complaining that if two people with very different incomes buy a house of the same value (one is living above his means, the other is living below his means), the one with the higher incomes saves more with the mortgage deduction. Sure, but he'd save more net with any deduction since X * .25 is always going to be greater than X * 0.10. The market isn't a well-oiled machine operating by precise algorithms,as much as quants on Wall Street would like to make it one. Yes, the fact that people can (theoretically) afford more house will have an upward affect on house prices, but the housing market is affected by many, many things. The housing market could tank (again) regardless of incentives, so no one can say if there is a long term benefit or not at this time. To the degree that in a vacuum, your algorithmic theory is correct, yes, mortgage deductions are short-term benefits at best.
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Post by robeiae on Dec 28, 2017 10:30:48 GMT -5
Forest and trees. Sure, specific deductions can be beneficial in the moment. One can find a ton of people--myself included--who benefit on a year-to-year basis from the MID. And sure the housing market could tank because of many things.
But set aside supposed benefits and costs (and even incentives) and consider these kinds of deductions from the standpoint of "why," alone. Why should some people (homeowners in this case, which in my mind makes it particularly wrong-headed) enjoy such a deduction? Why should they--all other things being equal--pay less in taxes by virtue of a choice they made, of a debt they willfully incurred?
Remember, the MID was not an independent concept; it's a leftover deduction from a time when all loan interest was deductible. Why mortgage interest and not credit card interest or personal loan interest? It's very possible that someone could be in debt because of medical issues or the like, right? Yet they don't get a deduction on interest paid because they don't own property, whereas a homeowner could take out a home equity line of credit (or refinance and take out cash) and get a deduction for interest paid. Fundamental fairness is still a thing, imo. And the MID doesn't reflect it at all.
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Post by Amadan on Dec 28, 2017 11:29:13 GMT -5
I just gave the rationale. The rationale - that home ownership by the working class should be encouraged - may be outdated. I won't be terribly upset if the mortgage interest deduction is eliminated (though I certainly take advantage of it while it's around).
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Post by robeiae on Dec 28, 2017 11:43:43 GMT -5
That rationale requires a leap of faith. I can give similar rationales for just about any deduction, including one that would make credit card interest deductible: eliminating personal debt should be encouraged (if you can deduct your interest payments, you'd have more money to pay down the debt). See? It requires a leap of faith, as well. There's no actual evidence to suggest there is any validity to these leaps, at all. Moreover, incentives--if we bring those back in--point in the opposite direction.
So again, the "why" behind the MID is not based on fairness at all. It's a "giveaway" (it's really not, as Don has explained) used by politicians to garner support. We should behaving more like rational adults with this sort of stuff.
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Post by Don on Dec 28, 2017 12:56:34 GMT -5
The NJ couple doesn't get a 25% break vs a 10% break to the flyover couple on their entire taxes - any deduction for someone in a higher tax bracket will count for more net dollars than a deduction of the same dollar amount for someone in a lower tax bracket. That's like complaining that if two people with very different incomes buy a house of the same value (one is living above his means, the other is living below his means), the one with the higher incomes saves more with the mortgage deduction. Sure, but he'd save more net with any deduction since X * .25 is always going to be greater than X * 0.10. Precisely. Any deduction is going to benefit those with more income than those with less income. That's the definition of regressive. If you have a progressive tax schedule, ANY deduction is going to be regressive. It's the nature of the beast. I don't see where we're disagreeing. The market isn't a well-oiled machine operating by precise algorithms,as much as quants on Wall Street would like to make it one. Yes, the fact that people can (theoretically) afford more house will have an upward affect on house prices, but the housing market is affected by many, many things. The housing market could tank (again) regardless of incentives, so no one can say if there is a long term benefit or not at this time. To the degree that in a vacuum, your algorithmic theory is correct, yes, mortgage deductions are short-term benefits at best. Of course the market isn't a well-oiled machine operating by precise algorithms. That's an econometric/Keynesian/central planning shibboleth that should have been dismissed following the Marginal Revolution and the widespread acceptance of the Subjective Theory of Value (see also: Marxism). Economics is a social science, not a hard science. Assuming that economics is all about monetary value leads to such fallacies as giving a new car and the replacement of a broken window the same weight in the GNP, or whatever they're calling it this week. That's why a priori reasoning is so critical if you want to understand economics. You can't tease any one variable out of the real world and prove your conjecture. It must be reasoned from first principles. Else you're just whistling in the dark. Blame the "well-oiled machine operating by precise algorithms" on those who believe the economy is a machine that can be manipulated by pushing the right buttons (See Also: Mortgage Deduction). Surprise! The economy is organic, and the "managers" understand that today about as well than the "managers" who almost destroyed Yellowstone a century ago.
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Post by Don on Dec 28, 2017 13:01:25 GMT -5
I just gave the rationale. The rationale - that home ownership by the working class should be encouraged - may be outdated. I won't be terribly upset if the mortgage interest deduction is eliminated (though I certainly take advantage of it while it's around). But as has been explained in excruciating detail, and not refuted, is that the policies enacted accomplish exactly the opposite by driving up prices and encouraging malinvestment. This is exactly what I was referring to when I said government programs, like any other good or service, must be judged by results, not by intentions. Whether home ownership by the working class should be encouraged is a policy question open to debate. Whether the policies enacted produce the results desired is an economic question, and the science is settled. And I'd like an answer to rob's question too: WHY should home ownership by the working class be encouraged?
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Post by Don on Dec 28, 2017 13:05:54 GMT -5
That rationale requires a leap of faith. I can give similar rationales for just about any deduction, including one that would make credit card interest deductible: eliminating personal debt should be encouraged (if you can deduct your interest payments, you'd have more money to pay down the debt). See? It requires a leap of faith, as well. There's no actual evidence to suggest there is any validity to these leaps, at all. Moreover, incentives--if we bring those back in--point in the opposite direction. So again, the "why" behind the MID is not based on fairness at all. It's a "giveaway" (it's really not, as Don has explained) used by politicians to garner support. We should behaving more like rational adults with this sort of stuff. Faith is the cornerstone of any true religion. Don't be bringing rationality into political discussions.
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Post by Deleted on Dec 28, 2017 14:27:46 GMT -5
Oh wonderful. Prices are going to plummet in Manhattan, thanks to this tax bill!
Not.
They likely will plummet when the economic crash hits, though. And now that we're another 1.5 trillion in the hole, we can't afford another stimulus. The rich get richer, the poor get poorer, and too many, alas, get stupider.
Also, count me in for deductions that encourage the well-being of others in society, even if those deductions do not directly benefit me. In my view, what benefits society as a whole does in fact benefit me.
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Post by Amadan on Dec 28, 2017 14:34:58 GMT -5
But as has been explained in excruciating detail, and not refuted, is that the policies enacted accomplish exactly the opposite by driving up prices and encouraging malinvestment. I am not convinced that the mortgage interest deduction is responsible for that, and you haven't demonstrated that, only argued that it's a contributing factor. I would put more blame on easy lending policies and sub-prime mortgages, which I'm sure you also have plenty to say about, and I'm more likely to agree with you. Note that I am not particularly endorsing the MID - my original point of dispute was with you claiming that those who support it are hypocrites if they also believe in various forms of "privilege." That, IMO, is a stretch to make a political point. Are you asking what I think, or what I think the official rationale is? The official rationale is that over the long term, home ownership is a better investment than renting and will improve the economic stability of the working class, especially in retirement (when, presumably, they will have paid off their mortgage). I know, of course, that many other factors make that often not the case, and there are rent-vs-mortgage calculators that demonstrate that while a mortgage is usually a better option, all things being equal, all things are often not equal. If we all made rational decisions, then home ownership by the working class would definitely be a net benefit, to the working class and to society as a whole. But the housing market has certainly proved to be irrational. So personally, I'm not sure home ownership should be encouraged. Or rather, the things I'd like to see would be more along the lines of stricter mortgage policies and less bailing out of homeowners in distress (and more importantly, less bailing out of creditors who lent to homeowners in distress).
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Post by robeiae on Dec 28, 2017 14:43:59 GMT -5
When you actually find such deductions, let me know. Regardless, no one is suggesting that eliminating the MID would somehow cause housing prices to plummet, in Manhattan or anywhere else. I couldn't even proffer such an argument in good faith, because it would be ridiculous. By the same token, no one should be making arguments about how the MID encourages home ownership or the like, because it just isn't true. Similarly, an adoption tax credits doesn't encourage adoption, imo. Indeed, I'd argue that ultimately it discourages it, by making adoption more expensive and--at the same time--actually discouraging adoptions from the foster care system, in favor of private and international adoptions. Here's the CRS on the adoption tax credit: fas.org/sgp/crs/misc/R44745.pdf Even the government sees it as ineffective. But god forbid anyone suggest getting rid of it, because that would make them evil and uncaring...
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