The Mortgage Interest Deduction Has Got to Go
Or, at least, that's what Nasim Nicholas Taleb says.
The author of one of my favorite books on investing and the economy, The Black Swan, is a gloriously cheerful pessimist. He's tough on Obama:
“Obama did exactly the opposite of what should have been done,” Taleb said yesterday in Montreal in a speech as part of Canada’s Salon Speakers series. “He surrounded himself with people who exacerbated the problem. You have a person who has cancer and instead of removing the cancer, you give him tranquilizers. When you give tranquilizers to a cancer patient, they feel better but the cancer gets worse.”
Today, Taleb said, “total debt is higher than it was in 2008 and unemployment is worse."
But he's also tough on a tax break that a lot of conservatives like:
Canada’s economy ... benefits from the fact that homeowners, unlike their U.S. neighbors, can’t take mortgage interest as a tax deduction, Taleb said. That removes the incentive to take on too much debt, he said.“The first thing to do if you want to solve the mortgage problem in the U.S. is to stop making these interest payments deductible,” he said. “Has someone dared to talk about this in Washington? No, because the U.S. homebuilders’ lobby is hyperactive and doesn’t want people to talk about this.”
As a homeowner, I love my mortgage interest deduction. (I love all deductions, period.) But it doesn't seem to make much sense, economically. The answer, as usual, is for taxes across the board to get fairer and flatter, and less jerry-built around specialized incentives and deductions. What are the odds, though, that there's anyone in Washington with the courage to make that kind of proposal? They'd get whacked from both sides, wouldn't they?
- Comment (19)
- · Quote
- · UnfollowFollow (2)
Comments :
Jul '10
Re: The Mortgage Interest Deduction Has Got to Go
Elect Steve Forbes.
May '10
Re: The Mortgage Interest Deduction Has Got to Go
I think you're exactly right.
May '10
Re: The Mortgage Interest Deduction Has Got to Go
I'm worried about Hollywood producers who are awake at 4 a.m. worrying about the mortgage interest deduction. It's very unnatural.
May '10
Re: The Mortgage Interest Deduction Has Got to Go
Hey-hey, ho-ho...
It doesn't make sense at all. The only bad tax cut is a targeted tax cut. However, you're quite correct in saying that such a repeal would be a political non-starter.
The logical solution? A rent deduction.
Sep '10
Re: The Mortgage Interest Deduction Has Got to Go
"The answer, as usual, is for taxes across the board to get fairer and flatter, and less jerry-built around specialized incentives and deductions."
That's the answer ,but, we all know that the government just doesn't work this way. As a white lower middle class D.I.N.K whose wife is self employed, I get hammered by just about every tax there is. Unless and until "taxes across the board to get fairer and flatter, and less jerry-built around specialized incentives and deductions", I am perfectly fine with being a selfish jerk and hanging on to this one deduction.
Jul '10
Re: The Mortgage Interest Deduction Has Got to Go
On a related note, do you ever watch HGTV? The shows where a couple picks a house out of 3 or 5, etc. it is remarkable how much space and how many amenities people need. A couple needed to move out of their 3 bedroom 2.5 bath home because they were going to have one baby. People require stainless steel appliances, without regard to whether it is gas or electric, which you would think would be the crucial criterion. Hardwood floors are desirable, but not in the bedroom. Granite is necessary, but Corian is not. High ceilings are requirement, as is a huge yard, yet the husband invariably says how little yardwork he is willing to do. People regularly complain about the paint color or the fixtures, but pay little attention to the layout of the property, or the quality of the cabinetry. No one goes in the basement or attic to see how well the house is built or investigate the HVAC or water system. It really opened my eyes on how superficial people really are.
A last note. All the flipping from one house to the other is a huge waste of money.
Jul '10
Re: The Mortgage Interest Deduction Has Got to Go
Canada was fortunate that its politicians were not foolish enough to force banks into lending money to unqualified buyers as was the case in the US under the Community Reinvestment Act.
As for the mortgage deduction, it is true that one cannot take it in Canada, however, one pays 7% GST on the purchase and capital gains upon sale. So when you add it all up, the costs of owning a house in the US and Canada are about the same.
But Dr Taleb is right about Obama doing the opposite of what should be done to grow the economy. The only question is whether it is due to incompetence, malevolence or both.
Aug '10
Re: The Mortgage Interest Deduction Has Got to Go
As with everything in economics, it depends on your end goals. Prima facie, the point is to encourage home ownership by lowering a barrier to entry, without costing the government too much money. And as long as everyone is taking out the traditional 15 or 30 year mortgage, it mostly accomplishes that goal.
(You could also call it a federal subsidy of local governments. Renters pay income tax on that chunk of their income, then once they own a home and start deducting payments, they also pick up property taxes which are paid locally.)
However, Taleb's point seems to be that such incentives are bad not because of any cost/benefit ratio, but because of the structural effects. I can see a case that it encouraged the kind of wacky ARMs and interest-only mortgages that screwed homeowners over. But I'd like to hear his full argument that it is the case before saying the deduction is really a bad thing.
Jun '10
Re: The Mortgage Interest Deduction Has Got to Go
Although Canadians pay a 7% GST (General Sales Tax) on the purchase of a home they pay no capital gains on the sale of their principal residence.
Jul '10
Re: The Mortgage Interest Deduction Has Got to Go
The real problem is the perception that flows from the mortgage deduction.
Way back when, during the flat tax debate, I would show co-workers that based ont he flat tax formula they would pay $1,100.00 less under the flat tax than under the current system (with their mortgage deduction) and they didn't care. They wanted their mortgage deduction!
It is hard to achieve a breakthrough with that kind of thinking.
Jul '10
Re: The Mortgage Interest Deduction Has Got to Go
Cas Balicki
Although Canadians pay a 7% GST (General Sales Tax) on the purchase of a home they pay no capital gains on the sale of their principal residence
You are right, sorry. But we pay income tax on it, if memory serves.
Feb '10
Re: The Mortgage Interest Deduction Has Got to Go
I'm a proponent of the Fair Tax, personally. It's not perfect, but it's simple and aims to be revenue neutral. The basic idea is to replace all income taxes (and deductions) with a national sales tax, and combine it with "prebates" for basic living expenses. The tax would only be charged on new goods, and only once. A lot of people have criticized it for one thing or another but many of the criticisms are based on misunderstandings or only looking at part of the big economic picture. The questions are addressed quite well on their FAQ and in several books.
Several aspects that I like about it:
Unfortunately, it has little chance of passing, at least in the current political environment, because it requires an amendment to the Constitution.
Jun '10
Re: The Mortgage Interest Deduction Has Got to Go
Ragnarok
Cas Balicki
Although Canadians pay a 7% GST (General Sales Tax) on the purchase of a home they pay no capital gains on the sale of their principal residence
You are right, sorry. But we pay income tax on it, if memory serves. · Sep 28 at 8:08am
Income tax is a tax on income a capital gain is by definition not income.
Aug '10
Re: The Mortgage Interest Deduction Has Got to Go
Bad idea! But a good one for the future. If the mortgage deduction were eliminated now it would cause real estate values to tank further.
The Flat Tax is necessary, and should be done ASAP. Exceptions must be made for certain sectors of the economy.
Re: The Mortgage Interest Deduction Has Got to Go
If that is the legal position in Canada, then hats off to Canada for intellectual honesty. In the US, "capital gains" are indeed considered income -- otherwise the federal cap gains tax would be unconstitutional. The courts here consider income to be any "accession to wealth." I'm not a tax expert (and if anyone is, please jump in) but I think that defintion is far broader than what was intended by the framers of the 16th amendment which authorizes the federal income tax.
I wonder if there is even the slightest chance that the Supreme Court could be persuaded to revisit the definition of "income." A narrower definition could wipe out the cap gains tax (and maybe some others too).
Jun '10
Re: The Mortgage Interest Deduction Has Got to Go
Adam, above I am referring to an highly technical definition in that capital is an accumulation of savings over time. Savings as all know are defined as income less expenses. Under such circumstances you can see that past income--on which taxes have been paid--becomes today's capital. The holder of this capital can choose to invest it in speculative ventures, hence any gain is technically an increase in capital or a "capital gain". The difference between interest income and capital gain is the imputed risk associated with the investment. I grant that to some degree both types of investment can be passive. That the courts may deem a capital gain as income stands apart from the fact that the taxing authority may treat the same gain differently.
Jun '10
Re: The Mortgage Interest Deduction Has Got to Go
Also, Canadian tax law imputes different standing to different types of investors. Where an individual may sell land at a profit and be allowed a capital gains treatment for tax purposes if it is a one off sale, a land developer would not receive such standing as his primary business is deemed for tax purposes to be trading in land. Consequently his gain is deemed income and subject to a higher tax rate. Correspondingly, this is the case with, for example, stockbrokers, who are subject to different treatment on the sale of stock than an occasional sale made by a casual investor despite the fact that they may be selling the same stock.
Edited on Sep 28, 2010 at 10:38amMay '10
Re: The Mortgage Interest Deduction Has Got to Go
I think that there is a chance that the deduction could be phased out over time and soften the effects, since it is simply folded into the investment decision, but this would only happen to raise more money, not as a trade for other reductions (the same "principle" applies to employer-provided health insurance).
The problem is that Congress goes the other way- there is a special tax break for first time buyers in the District of Columbia, and a deduction for second homes. Um, who do you suppose benefits there?
Sep '10
Re: The Mortgage Interest Deduction Has Got to Go
Before the Tax Reform Act of 1986 you could deduct credit card interest on your 1040. Since that deduction was phased out, have Americans reduced the amount credit card debt that they are carrying?
Are we really supposed to believe that the housing bubble was brought on by people looking to get a tax deduction? I’m all for a flatter tax with fewer deductions, but that would not have saved us from the housing crash. It was poor lending practices (some of which were government mandated), not tax policy, that caused this mess.