patrick.net

The mortgage interest deduction is welfare for the rich.

No. It is welfare for anti-development restrictionist-NIMBYists.

The reason I focus the income tax reduction on corporations is that they just raise their prices to include the tax anyway.

I think corporation should not be taxed. Or at least coporate tax should be minimal.

A luxury goods tax could pay for this.

I *hate* the concept of someone deciding how much "luxury" a person "deseves." Who is to decide? For example, a private jet may be a "luxury item" or it is an important business tool.

How can a system encorages abundance by penalizing abundance?

Flat income tax, national sales tax, consumption tax only......

Good grief, now I'm really starting to feel that a tin foil hat would do some good.

For the record, tax that penalizes a private jet is not a tax on abundance, it is a tax on FREAKING WASTE!! I don't give a rats ass whether it is "an important business tool".

Abundance is what we will have if we do not waste resources. Abundance does not mean to spend it like there is no tomorrow, abundance means to preserve so that future generations can also enjoy it.

And I find myself disagreeing with Peter P yet again, as is the case maybe 90% of the time.

"No oil left behind"
--could be a good slogan for US energy policy and practice

And I didn't make it up -- it was already on google, probably soon after the "no child left behind" law got enacted :),

For the record, tax that penalizes a private jet is not a tax on abundance, it is a tax on FREAKING WASTE!! I don’t give a rats ass whether it is “an important business tool”.

Fortunately, our policy makes do not agree with you.

A business can "depreciate" the entire cost of a jet over 5 years (part 91 ops). Better yet, after 5 years, the jet will usually worth MORE because of inflation.

What about capital gains tax and depreciation recaptures? The answer is 1031 exchanges. Sound familar? :)

NOT TAX ADVICE

Besides, what is wastage? For the same thing, some may call it excesses while some may call it abundance. Let's look at out electronics like iPods and iPhones. Do we really _need_ them? A advanced nation like this fine country ought not put value-judgement on economic behaviors.

"And I find myself disagreeing with Peter P yet again, as is the case maybe 90% of the time."

Yet Peter P is such a nice person that it's hard to dislike him.

Maybe he should be Dick Cheney's spokesperson.

I would not buy an iPhone until it goes through at least another two generations.

Personally, I think the Prada phone looks nicer. :)

I am happy with my Samsung phone. It makes calls and it is rugged.

Great quote from an Australian paper:

"[Politicians] believe they can make it easier for first-time buyers to acquire property while encouraging its value to rise faster than inflation for the benefit of existing owners."

That's it in a nutshell. They want a thing and its opposite.

Patrick

I heard a lecture by Milton Friedman back in the Nixon Phase I/II price-control days. During the question and answer period, the corporate jet question came up.

Friedman said his point was to remove tax policy effects from the conduct of business (including depreciation, boot, gains) so that businesses would concentrate on real-world costs and benefits. He had no interest in determining whether or not a corporate jet was either abundance or waste, and said his proposals permitted corporations to indulge in wasteful practices - and to reap the consequences - without the tax code entering into the matter.

That’s it in a nutshell. They want a thing and its opposite.

In short, government has no business in microeconomics. Micro-managing the economy will lead to macro-level problems.

But again, I am someone who believes social "equity" and "justice" are marketing tag lines. Honestly, nobody really knows what they mean.

Thanks for the Oz tax regime post, ajh. BTW, there's a 'summit meeting' of all state govt premiers happening right now in Darwin of all places to discuss housing affordability.

The only trouble is, they don't want to upset the huge base of voters who want to see their house prices constantly rising ahead of inflation, vs the relatively small group of Gen Y etc who are locked out of housing. It will be very interesting to see the watered down policy proposals coming out of this one. I predict more hopeless 'in the market' attempts at solutions like shared equity schemes with banks, plus a few broadsides at the Federal Coalition blaming them for allowing investment property interest rate deductions on mortgage interest, as per ajh's remarks.

It kind of reminds me of how the Oz Constitution was written -- a bunch of politicians got on a riverboat for a leisurely cruise for a few days, and all they did was take an existing document by a quiet thinker -- it was Hare or Clark -- and messed it around to take out a few lines that would upset the rich and powerful, thereby making it worse, and stepped off the boat and claimed they'd written it as a combined work of genius...

thanks also for that note, patrick... i didn't see it 'til i had posted...

p.s. Friedman was/is a complete wanker...

I see people saying the tax deduction benefits the rich, and then others saying replace it with a consumption tax, which benefits the rich because a lower percentage of the rich's wealth goes to consumption, that's why they're rich. In any case, to have an intelligent conversation, can we push class envy to the side, and have a real discussion?

First, I agree in general that there is a slight increase in valuation in considering the tax benefit so prices are a little higher than they would be. I also believe that it encourages wreckless borrowing, and takes away the incentive to pay off a house because the financially smart thing to do is to always max out the value of the house for the tax deductibility which then encourages more borrowing. (Move all debt to mortgage) This would actually be remedied if we made ALL interest deductible like it used to be.

Second, with the downward pressure on prices, it seems like unnecessary punishment to now raise the cost of ownership for people who are already on the brink. In analyzing tax strategy you want to have a net gain to tax rolls in making changes. What would the impact be to the economy to strain the middle class even more?

I know people logically call a tax break a subsidy, I tend to differentiate calling something a subsidy as being an external infusion of other people's money than just saying anytime there is a benefit it is a subsidy. I don't like emotional hot words used merely to make it seem like somehow it is corporate welfare for someone to get a tax break for owning a home. It is pretty well accepted that a society is more stable and healthy when people own their homes so even if removing the tax deduction makes sense, I am disturbed that people want to remove it merely for the reason that they think somehow it is sticking it to someone who has more than they do.

Why don't we go ahead and remove the tax deduction, but then not tax interest income. It would do the same, and would encourage savings, but oh darn it, it would benefit the rich. Forget it.

Why don’t we go ahead and remove the tax deduction, but then not tax interest income. It would do the same, and would encourage savings, but oh darn it, it would benefit the rich. Forget it.

Do we really want to encourage saving? The Great American Economy is built upon consumerism. :)

If we replace taxes with fees whenever possible either flat-tax or consumption tax should work fine.

>Besides, what is wastage? For the same thing, some may call it excesses

The waste I'm talking about is mainly oil consumption. A small business jet burns kerosene (jet fuel) to the tune of something like 1 mile (*) per gallon, for 1-4 passengers, compared to flying coach at 50-100 mpg per passenger (100mpg== boeing787). It is hugely wasteful. The resources being spent on building the jet could also be spent better elsewhere. Most business jets are just genital extenders and serve no practical purpose other than massaging big egos. Much like Hummer cars in that respect.

(*) HeadSet or someone else may have the right background to provide some accurate consumption numbers. My small jet estimate is just an estimate using some wikipedia info about a Cessna Citation small jet.

Sean,

Yeah, Friedman was a total wank. Typical theorist that either didn't understand, did not care, or perhaps _wanted_ the practical consequences of his idealized theories. Of course, the laizzes-faire right-winger types are more than happy to put Friedman on a pedestal and invoke his theories when they can smell a tax break for the rich coming out of it.

p.s. Friedman was/is a complete wanker…

Oh DS, we'll need a couple of pints when I'm in Sydney, it seems...

Malcom,

It is pretty well accepted that a society is more stable and healthy when people own their homes so even if removing the tax deduction makes sense, I am disturbed that people want to remove it merely for the reason that they think somehow it is sticking it to someone who has more than they do.

The tax break does not significantly increase home ownership and it is subsidy to the rich. People on the margin of buying a home in most communities get very little benefit from the tax break. You need either to pay a lot of interest of or have a lot of other deductions to make up for the standard deduction both of which are characteristics of rich people.

Additionally, prices just increased to make up for the deduction. While eliminating the deduction might have some negative short run consequences, a cap that blocked rich people from deducting large amounts of interest on their multi-million homes seems much fairer than poor people subsidizing the mansions of rich. You might not like the word of subsidy but any economist will tell you that is exactly what a tax break is. There is zero difference in economic terms between a tax break and a check from the US Treasury.

MiC

While I don't agree with Friedman on a vast many things, he's right about not caring about corporate jets. Congress is a bunch of wankers as well and anybody who things that Congress can pass regulations to effective control corporate spending just hasn't been paying attention. If you are concerned about jet fuel, tax that, don't mess with the general tax code. Directly raising the price of any good through taxation will get people to use less of it.

If you are actually concerned about corporate waste, get Congress to bar poison pills and other takeover defenses. Private equity firms will get rid of wasteful spending faster than you can blink. Anti-takeover state laws have made hostile bids all but impossible in the US . These measures benefit management at the expense of shareholders. Market discipline is always more effective than Congress can be.

I'm only making hit-and-run Zen Socialism remarks on patrick.net from now on, I've decided... forget the in-depth analyses and critiques, backed by copious references and showing staggering insight and profundity...

I might make justme my drinking buddy, Randy ;)

I’m only making hit-and-run Zen Socia1ism remarks on patrick.net from now on, I’ve decided… forget the in-depth analyses and critiques, backed by copious references and showing staggering insight and profundity…

I might make justme my drinking buddy, Randy ;)

From the thread post:
The deductibility of paid mortgage interest from income does not help house buyers. It simply drives up the cost of housing to the point where it is just as unaffordable as if there were no such deduction.

I agree with this, along with other incentives like 'First Home Owner Grants' (FHOG) and stamp duty exemptions for first home buyers -- these can help a little, but they all run the risk of being capitalised into house prices by a greedy RE industry.

I will be interested to see what the Darwin housing summit produces, hmm -- my suggestions are to somehow target the root causes of the most recent inflation rather than ameliorating the problem with strange financial bandaid measures, but this would be unpopular with a big segment of voters. Are politicians genuinely bewildered by the problem, or are they just playing dumb so they don't have to get involved in a messy situation which has historically always corrected itself? (Although the conventional housing market has always been riven with examples of failure.)

Completely off topic to mortgage interest, but of general interest to Bay Area Bubble Watchers...

1. Go to zillow.
2. Run a search on your favorite area.
3. Uncheck all the options for
- For Sale
- Make Me Move
- Recently Sold
- All Other Homes
4. Now, check only the box for "Recently Sold". It will show a bunch of yellow flags on the map.
5. Click any yellow flag to see a small pop-up window.
6. Compare the Recently Sold price to the Zestimate.

I am seeing consistently 10%-15% lower numbers for actual recently sold prices, compared to the Zestimate. In one case, I actually saw a 30% difference. This was in the Friggin Fortress, btw. Fortress my ass, :-)

And wait, there's more! If you now click the checkbox for "For Sale", you will see little red flags marking homes on the market. Click the flag - the Asking price is still generally above the Zestimate.

SP

For those who did not want to read the earlier post, here is the summary:
Actual sale prices are 10-15% below Zestimates.
AND
Asking prices are still higher than Zestimates.

It is obvious what this disconnect will do for the comps when recent sales start getting included in the stats.

SP

As a director of maintenance for a corporate flight department responsible for maintaining two Challenger 601 business jets I have to take exception to all this hostility towards people that own them and even the jets themselves. Do you have any idea how many people are employed to support corporate aviation? I doubt it. And most of these jobs pay very well. If you choose to go after the rich folks that own the aircraft you will ultimately be going after many thousands of ordinary guys like me that will no longer have jobs building, maintaining and supporting these very same aircraft.

There are always cheaper ways to travel no matter who you are but people with means have good reasons to choose a corporate jet. They are able to fly into airports all over the world that no commercial aircraft could ever land in. The aircraft will never leave without you no matter how long you've been delayed. Your aircraft will never be hijacked by a terrorist. The aircraft themselves have a phenominal safety record. For example since Gulfstream first began sales of their aircraft back in 58 not one has been lost to anything other than pilot eror. Boeing and Airbus can't make that claim. Finally the interior layout is well suited to business making it possible for groups to interact with each other and prepare for meetings while enroute to them. Try that in first class and see what happens.

I see David J has provided most of my would-be response to the ego-extension observation above.

From the vantage point of utility, when CEOs, CFOs or governing boards make use of private aviation, they depart locally on their own schedule. If your headquarters are located somewhere other than an aviation hub, say, Charleston WV and your destination is Ocala FL, civil aviation isn't of much use to you. Factor in a corporate plane and your business is conducted in an afternoon and involves no overnight stay. That is what real-world companies weigh when considering the purchase or shared lease of an aircraft: utility.

I don't know why I bother. Some here invariably see poverty in all its guises as virtuous and wealth just as invariably as tainted.

Let me be clear for once. I see no evidence either camp owns either franchise.

DS,

One factor in Australian housing prices, which I bet will NOT get mentioned in Darwin, is the perverse incentive in the tax system for people to buy the biggest possible house. I should have mentioned this in my previous post.

In short, the structure is not taxed at all in Australia, only the land. So if you have a $100K block of land, you will pay virtually the same taxes if you have a second-hand transportable home or a 600sqm (6500sqft) mansion.

MonkeyInChief,

You're wrong on a couple of points in your response to my post above.

First, the deduction caps out on 1 million dollar mortgages. Most of the regular posters here seem to be middle class software guys. Hardly what I call rich, and in their areas 1 million dollar homes are almost starter homes. Hell, my girlfriend's parents have a shack in LA that was pushing a million dollar value at the peak of all of this. The point being, 1 million dollars right now is not considered anything special for housing, so it is NOT a perk to the rich. Secondly, the only reason people who are wealthy have mortgages is as investment capital. If the mortgage doesn't make sense financially they pay it off. Don't confuse the silly mcmansion owning, hummer driving, just received an NOD pig as rich. That's not rich.

Your other points sound good but don't ring true historically. Prices are currently falling, and have in the past with no change to tax laws. In your points, and others have done this as well, it is almost made to sound like the legislature granted a tax deduction for mortgage interest as a subsidy to some special voting block. This is not the case, it used to be until 1990 that all interest was deductible. The tax laws were changed about that time where most interest was now not deductible but home loan interest was left alone. A snapshot of that effect, well even without an insentive to borrow, unsecured debt is higher than ever in this country, I just heard a figure of 7 trillion which is basically almost matching the national debt. Gotta love consistency in Americans. As you may remember, home prices fell from 92-95 pretty much immediately after the laws changed.

The issue I take with using the word subsidy is not a purely economic one. You are technically correct about the effect theoretically being similar, but interest is a legitimate deduction for a business, as has been pointed out on the thread. So why shouldn't an individual be able to deduct interest? To me that seems like a very progressive tax structure since the poorer groups would benefit the most.

Not taxing someone is NOT a handout. It is not a subsidy to not tax income paid for medical treatment, under our tax laws some things aren't taxable, that is different than infusing someone else's capital to support an industry. I take issue with the concept of the government not taxing something so now it is considered a subsidy in the negative sense. Ironically this thinking was started by the Jesse Jackson types who to make his listeners not feel ashamed about the real handouts threw the 'coporate wellfare' term around. It is kind of catchy, I have to admit. Basically you can make a bum feel proud if you compare a handout to not taking something from someone. There is a subtle difference.

Corporate jets are awesome, I would love to have access to one. Would you guys please stop trying to destroy yet another American industry with this class warfare? Do you have any idea of the amount of economic activity a jet causes? Depreciating a corporate jet, or deducting lease payments is not a subsidy either. Man, I get nervous reading the board sometimes, it is so not inline with the concept of America for a group of people to sit around looking down their noses at the success of others and determining which of their assets are necessary and which are not. You take the fun out of life that way. Everyone has to be just as miserable as someone else for the system to seem fair.

Just to be clear, I am not solidly in favor or against removing the mortgage interest deduction, I'm just skeptical of the reasoning behind the arguments for doing so.

Like I said, the economic theory, and similarities to subsidies seem to make sense but the anecdotal evidence like the fact that prices and interest rates fell even as MID was left alone doesn't support the theory.

Screw corporate jets. Isn't it about time everybody move to video conferencing?

And if we want to talk about corporate expenditures in terms of job creation...then I demand a tripling in corporate compliance officers, a quadrupling of the Internal Revenue Code, and mandatory foie gras and fava bean dish with every expensed meal!

Astrid,

EXACTLY! Why do CEOs need to jet around when they can video-conference. The answer is "to impress people" and "to be exclusive".

The emperor has no clothes.

Malcolm,

What other Great American Oil-Burning Industry got destroyed by "class warefare"?

I was thinking NASCAR, but they still seem to be driving around in circles every weekend when I flip through the channels...

justme said,

EXACTLY! Why do CEOs need to jet around when they can video-conference. The answer is “to impress people” and “to be exclusive”.

The emperor has no clothes.

While there may be some of this, the main reason business people "jet around" is because there is still, to this day, no more efficient and effective way to do business than to meet face to face. I will not enter into any arrangement, deal, alliance, or customer relationship without first meeting the person face-to-face. Don't underestimate how much essential communication is non-verbal.

When it comes to development teams, I've spent over a decade managing globally dispersed software teams in telecom, where we have access to the state of the art video conferencing facilities. Of the most efficient projects, I have to add at least 20-25% additional management and process overhead for any endeavor to be successful, regardless of how many fancy video-conferencing centers we have at our ready. These projects inevitably end up being Unified/RUP projects where a good deal of time is spent doing documentation that will become obsolete within 3 months. Contrasting that to Agile projects, I can accomplish the same objectives without that 1/5 overhead for method documentation and management and usually cut another 1/3 off of the time-to-market, even including the cost of having a post-release set of documentation produced.

That's the power of having everyone sitting in the same room using the same white-board, eating the same ordered-in lunch.

We are running smack dab into the middle of the mortgage interest deduction issue. My husband has been making more money over the last couple of years and that, of course, means higher taxes. We are literally at the point where we're going to be forced to buy a house just so we don't get totally reamed on taxes and owe several thousand at the end of the year. The deduction is enough to make us pay more up front on a mortgage instead of rent because we'll save more in the long run.

We've talked about the mortgage interest deduction in quite a few past threads. I contend that it is really the primary "behavior-driving" tax policy involved in residential real estate, not the capital gains exemption (which people like to bitch about a lot here).

That said, qualifying mortgage interest deduction *will not* go away. Not in our lifetimes. Not until there is some catastrophic failure of some type, something much bigger than just a house price correction. Otherwise, Realpolitik wins.

SQT, the deduction is a very powerful factor in the buy -v- rent equation. There's no shame in taking a deduction offered. With the right income/tax scenario, the mortgage deduction can go a long way to offsetting the cost of borrowing money, in which case it's like the government taking money away from savers and giving to you to finance your house at a subsidized cost of capital.

We're in the same boat. Prices don't have to come down by much more in our area before the net-of-tax equation starts to get close to the cost of renting. That's kind of the tragedy of the way the tax deductions work. Looking through titles in Marin one will find a surprisingly high number of folks with right around $1.1mm in home debt. Maybe not surprisingly, given the qualified portion is $1.0mm on a primary and $100K on a line. That's a lot of government-subsidized cheap capital.