The Case Against the Mortgage Interest Deduction | Hacker News Reader

The Case Against the Mortgage Interest Deduction

priceonomics.com

44 pointstnorthcutt68 comments

> The largest tax break relates to health care: it makes the premiums paid by companies that offer health insurance exempt from payroll taxes.

We really should start with that one. If anything, replace it with an individual deduction. It'll be a double-whammy. Get rid of this bullshit subsidy for large corporations and at the same time level the playing field for small businesses and individuals trying to get coverage.

It really shows how corrupt the system is. If you buy insurance yourself on the exchange, then you pay with post tax dollars. If you happen to work for a large company whose population is obviously more desirable to insure, then you get a huge discount on health insurance.

If you're a small employer employing people on the lower end of the economic scale, then you pay through the roof if you want to buy a group health plan because your population is probably not too desirable, and if you try to reimburse your employees for their own individually purchased health insurance (because you don't have time to deal with all the stupid health insurance laws like COBRA and stuff), then you also pay with post tax dollars.

Using the tax code as a political bargaining chip is a time honored tradition that, unfortunately, isn't going away soon.

> If you buy insurance yourself on the exchange, then you pay with post tax dollars.

It's deductible at tax time, though.

The full amount above the line only if you are self employed, and otherwise below the line and only the amount the it exceeds 10% of your adjusted gross income. Unless I am missing something?

Can you pay the premium out of an HSA? That's pre-tax.

My reading of IRS publication 502 is that you can pay COBRA premiums, medicare, and premiums if you are on unemployment, but not otherwise.

To my knowledge you can only do that if it's COBRA or a few other fairly unusual situations.

No an HSA is for out of pocket expenses. Monthly premiums cannot be paid from it.

The health insurance exemption only helps the healthcare industry; without this exemption, people would rather be paid cash than get expensive extra healthcare benefits. People would probably rather buy their own health insurance than have an employer choose it, and most employers would rather offload the trouble of managing health insurance (as many have healthcare departments, which is not their core competency).

Unfortunately the Affordable Care Act (A.K.A. ACA, Obamacare) cemented employer-purchased healthcare into place with the employer mandate.

I think it's also possible that a large employer being able to offer health insurance much more cheaply per employee than a small employer can gives the large employer that much more advantage over the small one for no reason.

And it is a way to a job serfdom - the cost of unemployment is greater. And - is anything worth risking my family health plans for?

Employer provided insurance should stop existing.

That is a very good point, and I have never looked at it that way. Unfortunately, this is exactly what we should expect, as governments usually consult large organizations for feedback, and small (or as-yet unformed) organizations are put at a great disadvantage.

The ACA was directionally correct in terms of the individual mandate though, and hard enough to pass as it was. I would expect with a Hillary presidency we'll see more progress made towards separating employment and healthcare.

> The ACA was directionally correct in terms of the individual mandate though, and hard enough to pass as it was.

The ACA was a cop out. If you're not going to go to either single payer or at least include a public option (i.e. buy into the equivalent of public Medicare) then it's all a way to force people to send money to insurance companies. The Dems had a supermajority in the senate but either didn't have the balls to do the right thing, or, more likely, just wanted to suck up to their corporate interests.

> I would expect with a Hillary presidency we'll see more progress made towards separating employment and healthcare.

Ha! I'm sure she'll be just as tough on Wall street too.

> We really should start with that one. If anything, replace it with an individual deduction. It'll be a double-whammy. Get rid of this bullshit subsidy for large corporations and at the same time level the playing field for small businesses and individuals trying to get coverage.

We really should just drop both and replace it with an increase in the standard deduction for individuals.

Given that deductions come out of top bracket income, it might be more fair to adjust the brackets and reduce the standard deduction.

Of course it all depends on what the hell fair means. The people with income in higher brackets are still paying more taxes after deductions.

I'd say the poorer you are, the more you need the tax deductions honestly.

It really does not matter if they're tax exempt at payroll disbursement time or as a deduction on filings.

The trouble with employer-based health care is much more about the fact that employers get a volume discount that individuals or small businesses do not. Even then when Ive worked W2 contract, I've had health care offered by the contracting company for reasonable amounts.

The first comment in that article points out what's really the cherry on the stupidity cake: it's not even that the mortgage interest deduction is small-but-at-least-something for middle-class families. For a lot of them it's literally zero, because it's often less than the standard deduction. Even leaving aside the political class's counterproductive obsession with homeownership, the insanity here is of the masses passionately supporting a $100 billion annual expense that benefits them not one cent.

Just another one of those things that makes me fantasize about a rationalist dictatorship, before I sigh and return to the real world.

The mortgage interest deduction is the thing that makes it possible to itemize for most people. Then you also get to deduct your property taxes, your state income taxes, charitable contributions, other misc stuff.

Any of those things separately is often less than the standard deduction. But all together they are more, and the mortgage interest is generally the biggest and the one that pushes it over the top.

Fine, but then it's only helping to the extent that the taxpayer is over the standard deduction. If their mortgage interest was $1000, but they end up just $1 over the standard deduction then technically it helped - but only by 15 cents (depending on their marginal rate).

That depends quite a bit on your state income tax and real estate taxes. In MA, it's quite easy for those to exceed (or near) the standard deduction amount, meaning the mortgage interest deduction will push you over into itemizing.

A single person earning $60K and paying $4K in real estate taxes has already exceeded the standard deduction amount.

I agree 100% that we should get rid of this deduction. I owned a 3 bedroom, 1 bath house in Manhattan, KS (an affordable part of the country). I never qualified for this deduction. The house was too cheap and the interest on the mortgage was too low.

I was solidly middle class.

This deduction benefits people spending substantial amounts on mortgage interest, thus it mostly benefits people buying McMansions (or actual mansions). In theory, middle class individuals in large cities are helped to qualify for homes because housing prices are so steep in the big city. In practice, it encourages "house inflation" where The Haves buy and build bigger and bigger houses and The Have Nots are piled up in rentals like cord wood or out in the street. If you can afford a house at all, this deduction actively encourages you to buy as much house as possible. It deepens the divide between The Haves and The Have Nots, thereby shrinking the middle class, not helping it. It helps ensure that you are either rich or poor in this country, not middle class.

I share your experience - I lived in both Texas and Florida in modest houses, and I think we could take the MID only once.

It's getting to where it's not that clear that a McMansion is a "have" thing, especially if it take maxing out the mortgage.

The real difference between "haves" and "have nots" is their credit rating. In places, the premium for rental may approach 100% of the payment if the same owner occupied the same house in a 20% down mortgage.

But at the same time, people will max the mortgage out, so selling a 3-1 in Manhattan, Ks may be a very real challenge.

Almost every time that something is subsidized, it will go up in price. A person's marginal propensity to consume means that if a deduction leads to money being saved, that money will actually be put toward the same product. But instead of bigger houses, we get the same house, just priced higher.

Housing prices will be lower without the deduction, actually helping first time buyers more since the down payment will be more achievable. Alas, eliminating the deduction will never happen.

> But instead of bigger houses, we get the same house, just priced higher.

This seems to assume a monopoly supplier charging monopoly rents, but is an untenable conclusion if housing is supplied in a competitive market. (It also neglects the fact that its not a flat subsidy, but one where the subsidy rate is positively correlated with income, so that -- within the limits of the deduction -- higher income earners get a higher subsidy rate, and thus the spread in buying power between them and lower-income earners is increased by the existence of the deduction, which even in a monopoly-supply situation would mean that the effect across the market was not "everyone gets the same houses as they would without the subsidy, just at higher prices".)

Land is fixed, so the greater ability to pay from the subsidy simply increases the 'rent' earned by landowners. To a great extent, one gets the same house on the same land, but priced higher.

> Housing is not land, and quite often in the United States is not provided in a way which makes maximum practical use of land, so land being fixed is pretty much irrelevant to whether housing supply is fixed.

It's clearly relevant-- the fixed nature of land makes is what limits the supply of housing. Both due to the obvious situation -- we can't build housing because there's no available land for it-- as well as the more complicated case where the limited supply of land is downzoned to create wealth for landowners.

> If "landowners" were a single monopoly supplier, this, again, would be a reasonable conclusion. The ability to capture value from the subsidy, however, depends on the ability to provide value from housing on that land, something on which landowners naturally compete.

It is uncommon for them to compete. It is much more common to enact restrictive zoning laws (and other bureaucratic measures) so they do not have to.

> Land is fixed

Housing is not land, and quite often in the United States is not provided in a way which makes maximum practical use of land, so land being fixed is pretty much irrelevant to whether housing supply is fixed.

> so the greater ability to pay from the subsidy simply increases the 'rent' earned by landowners.

If "landowners" were a single monopoly supplier, this, again, would be a reasonable conclusion. The ability to capture value from the subsidy, however, depends on the ability to provide value from housing on that land, something on which landowners naturally compete (qualitatively, even where the do not do so on some quantitative measures, such as floor space, as robustly as would occur in a truly freely competitive market because of, e.g., zoning restrictions.)

> but is an untenable conclusion if housing is supplied in a competitive market

Housing is not a very competitive market. Entitlements (whoever first claims land can generally hold onto it) and policy (predominantly zoning), leads housing stock to be fairly inelastic to demand, and those supplying housing tend to be price-takers.

Unfortunately the mortgage interest deduction is a major third rail in U.S. politics and it is probably here to stay.

This article is 100% spot on though--it is a completely regressive policy and privileges those with enough capital to purchase real estate at the expense of those who have no choice but to rent.

Only if you look at it as media moguls try to sell the concept.

As implemented, much of the benefit goes to the wealthy with both pricey primary homes and with secondary homes.

If you instead limited it to primary homes only and only up to, say, property prices 1.5 times the median single family home price for the area, you'd recover a majority of that deduction right off the bat without harming lower- or middle-income home ownership or causing a dive in property prices or lose the stability benefits of home ownership.

The equivalent in the UK (MIRAS - https://en.wikipedia.org/wiki/Mortgage_interest_relief_at_so...) was abolished in 2000 without too much fuss.

Yep. While in the abstract I would support eliminating it, now that I've finally purchased a home I'm against any changes to the status quo. The very economics of this huge purchase are only made rational by that deduction.

What about phasing it out over 20 years?

The deduction related to the purchase decision you just made will be a lot smaller by then and you would know what the new rules were for future decisions.

What about implementing an equivalent deduction for renters? I know renters theoretically benefit from their landlord's deduction, but that only applies if the landlord is carrying a mortgage, and tax benefits for landlords have a dubious record of filtering down to renters.

> Countries including Iceland, Luxembourg, and Switzerland, in fact, tax homeowners for “imputed rent”: the amount of income homeowners would earn if they rented out (rather than lived in) their home.

Do homeowners in those countries also get imputed deductions for whatever things people who are actually running rental businesses get to deduct?

Housing prices are whatever people are able to pay. If everyone's able to take up a bigger loan thanks to mortgage interest deduction, then house prices will rise to meet the increased demand. End result: We have to effectively pay the same (bigger loan but with tax deduction), but because everyone takes up bigger loans the national economy becomes more brittle.

Yay? It's just the government pushing money into the construction industry, which really is the only beneficient, and it's all disguised as a gift to the middle class. It's just dumb.

> Housing prices are whatever people are able to pay.

I fail to see the justification for concluding that housing prices are set by demand alone, not the usual interaction of supply of demand.

The short-term supply of housing is fixed. Yes, there will be an increase in renovation of houses due to larger loans being affordable, but most of our housing costs are the cost of centrally located floorspace anyway, whose supply moves really slowly. Supply of central floorspace increases due to mass transit buildout, city expansion, and building height, only the last of which depends on average ability to pay for housing. Building height is usually restricted by zoning, in which case average ability to pay doesn't influence supply at all.

> The short-term supply of housing is fixed.

Sure, so the immediate-term effect of a change in policy on the deduction would be what you would expect with a fixed supply; but that's hardly the only, or most important, effect to consider with a long-term policy.

Land-use policy makes it far more attractive to resist growth, enact restrictive zoning laws, and engage in speculation, rather than listen to the signals of demand. This has been the case for the last century, and without a fundamental change in our policy, will almost certainly continue to be the case.

A land tax would be the silver bullet here-- it would align the incentives for landowners to listen to rises and falls in demand.

>which really is the only beneficent

You may be forgetting the banking sector.

Heh, yeah. It suddenly looks a lot better.

Isn't this just an indirect subsidy for banks? Basically, the government partially pays for the interest rate the bank charge on your mortgage.

> For this reason, organizations like the Congressional Budget Office treat tax breaks and government spending as essentially equivalent.

This seems weird. Collecting and spending money has overhead and externalities (enforcement for example), while not taxing in the first place does not.

There's definitely an overhead to tax breaks.

There's a difference between simplifying the tax code, which would theoretically reduce overhead, and providing an itemized tax break, which actually increases complexity (and yes, there's enforcement of that tax break too).

Treating a tax break like government spending seems completely rational.

Even if a tax break is simply lowering a marginal rate (which it rarely is), it's not like enforcing a 36% tax is less costly than enforcing a 40% one.

"Not taxing" also includes overhead for ensuring that people aren't abusing the deduction or exemption, or the societal/political costs involved in the perception that select few get a free pass (i.e. overshore tax shelters).

Now that I think about it a little more, this seems like a red herring. Just because the budgeting office says two numbers are the same on paper, doesn't mean anything about the efficacy of the policy, for or against.

Those externalities are already being paid.

I bought my first house and only made 4 payments which brought me over the standard deduction. I only put 5% down though and I live in a more expensive area than most.

> It first appeared in 1861, born out of a necessity for Civil War funding, and in 1913, Congress made the income tax a permanent part of American life.

And federal income tax should again be eliminated. The federal government should get fed from the hands of the state, not the other way around. Having all of the money flow down from the top is helping to create this mess we're in now.

The one that controls the purse holds the real power. Federal income tax is consolidating that power at the top.

The Civil War, and the period preceding it, sort of put the lie to any attempt to idealize the states as somehow a more pure, less-corrupt or less-oppressive place to put government power.

Lincoln put it best - half-slave and half-free won't work. They were legally immiscible ( unmixable ). The abuse of "states rights" in text by Southrun Lost Causers is invalid and should be discarded - the Fugitive Slave Act and the Dred Scott decision clearly showed that they wanted Federal enforcement of that "state's right".

You have the emerging legal unsustainability of this, coupled with slaves being the only asset of value left in the South. So, war, war.

If you read the history, the form of government the US has failed and failed and failed while trying it the way you describe. The US was on the verge of collapse when it re-arranged things a bit and handed over more power to the federal government. That's why the country still exists. In its earliest days, it was in danger of collapse just like every other state that had attempted the same kind of organization.

If we take away the federal government power to a) raise money and b) keep a standing army we will likely see this country destroyed in short order, whether from within or from without. Quite a few countries would be thrilled to pieces if we hamstrung our federal government so they could invade and do as they please.

This country seems quite capable of destroying itself in short order regardless.

Now we have unstoppable constitutional rights abuses and endless drone wars in far away lands. Not to mention a lobbying apparatus that can concentrate "donations" to less and less people to get its way.

Which time period specifically are you talking about?

The US was originally founded as a Confederation:

http://faculty.washington.edu/qtaylor/a_us_history/am_rev_ti...

http://www.historyplace.com/unitedstates/revolution/confed.h...

This emphasized state powers. The central government was extremely weak. The constitution came about in 1887, more than a decade later, strengthening the central government.

http://www.gilderlehrman.org/history-by-era/creating-new-gov...

http://faculty.washington.edu/qtaylor/a_us_history/1700_1800...

The initial form of government under which the US was formed was a confederation of independent nation-states. This form of government never survived long and the newly born country was foundering until they made some critical adjustments, thereby strengthening the central government.

I am not going to research this further. Off the top of my head, the central government initially lacked teeth in terms of ability to a) raise money and b) raise an army. This was threatening to cause the entire thing to collapse until the form of government was fundamentally altered. The confederation was put to an end when we ratified the constitution, iirc.

We are talking about very early American history, if that helps.

Thanks. It looks like you were mixing up two different time periods then.

The US income tax was only ratified in 1913, which would put its creation to just a year before World War 1.

So the US "survived" just about 124 years of modern civilisation without an income tax.

I don't realistically think that anyone is talking about returning to the days of the "Confederacy" that lasted what 2-3 years back in the 1700s, but the fact of the matter is that you have a lot of latitude in how you can separate powers between different governmental bodies and not collapse as a country.

If you were to replace the direct federal income tax with a levee on individual states (whom then go on to decide how and when to tax their residents), I doubt the government will 'collapse'.

Now to be fair, the US is a lot more decentralised than many European countries yet it is still more centralised than its northern neighbour Canada.

> The US income tax was only ratified in 1913, which would put its creation to just a year before World War 1.

The US had an income tax before that. What was ratified was a Constitutional amendment giving the federal government plenary and independent power to levy an income tax.

No, I am not mixing up anything. You and I are just focused on different pieces of the GP statement. Suggesting, as you are, that things could be monetized differently is a rather different position from decrying the role the federal government plays and actively advocating for essentially hamstringing it.

> the mortgage interest tax deduction, which, at an annual estimated cost of $77 to $100 billion...

Oh please. What a puny number that benefits such an enormous amount of regular people.

The cost of war in Iraq is estimated at $12 billion a month[O]. Eliminating this deduction wouldn't even buy us another senseless and irresponsible war!

[0] http://www.businessinsider.com/the-iraq-war-by-numbers-2014-...

>>What a puny number that benefits such an enormous amount of regular people.

Well, I guess that depends on your definitions of "puny" and "regular". Since 75% of the benefit goes to people making over $100k/year, that must be your definition of "regular people." Which isn't really statistically defensible, but might be your personal experience. I'm not sure $100bn really counts as "puny" even to the Feds, though. Granted 3% of last years' revenues isn't a huge number, but neither is it a rounding error.

Personally, I think it's absolutely silly to forego tax dollars to encourage people to go into debt. Not that I'm above taking advantage of it every year, and probably deriving more benefit from it than most.

I'm still trying to figure out what any of this has to do with the Iraq war, though.

> 75% of the benefit goes to people making over $100k/year

It's much closer to households making over $100K/yr than people making that.

If it's a puny number, and enormous number of people benefit from it, and the benefit is 100% financial (as in this case), then each person isn't benefiting all that much from it.

$77-$100B is equal to $618 - $800 per US household.

What do you think our government will do with that money? Give it to the poor?

It will go right into bloated defense spending.

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