Study: Upper Class Entitlement Helps Upper Class Most

The Wall Street Journal has a write-up of a new study by the R Street Institute that looks at how the mortgage-interest deduction is taken zip code by zip code. Conclusion?

tax preferences, particularly the mortgage-interest deduction, have helped drive up the size of houses by as much as 18% in the nation's most affluent areas while not broadly encouraging people to buy homes. […]

the government's tax subsidies for housing "don't encourage homeownership in any meaningful way. People just end up buying larger homes," said Andrew Hanson, an associate professor of economics at Marquette University who conducted the study along with two other economists.

Reason's Anthony Randazzo and Dean Stansel were on this story 28 months ago, in a piece titled "The Upper-Class Entitlement: It's time to end the mortgage interest deduction." From that:

This longstanding incentive, which allows individual taxpayers to deduct up to $1.1 million in home loan–related interest payments from their taxable income, has warped the real estate market and overwhelmingly benefited higher-income Americans, all while failing to achieve its stated policy objection of promoting homeownership. […]

If [the] $1.2 trillion in itemized deductions was instead spread throughout the tax base, the average tax rate could be reduced by roughly a fifth, from 17.8 percent of taxable income to 14.5 percent. Such a tax cut would directly increase the reward for productive, income-generating activity. Closing loopholes such as the mortgage interest deduction while lowering overall rates would lead to a more productive economy.

Link via the Twitter feed of Neil King.

Comments

[Acosmist]

How the fuck is it a "loophole"?

[Roger the Shrubber]

A loophole is any part of the tax code that provides a deduction to someone you don't like.

[Drake]

So pages 2 to 2 million of the tax code.

[Pavlov's Cat]

So you're OK with the other 73,954 pages?

[KDN]

Those only affect oil companies and are therefore acceptable to all libertarians.

[Rich]

This longstanding incentive, which allows individual taxpayers to deduct up to $1.1 million in home loan?related interest payments from their taxable income, has warped the real estate market and overwhelmingly benefited higher-income Americans, all while failing to achieve its stated policy objection of promoting homeownership.

At *last*! Here comes the flat tax, or at least fixing the broken, complicated, and unfair tax code!

[Longtorso, Johnny]

This is my shocked face.

[JW]

Look, who do you think knows better for what ails our great nation? Policy wonks at some middling think tank, or Realtors? TOP MEN?

[robc]

In the initial income tax code, all interest was deductible.

[robc]

The reason being that recipients of interest had to pay taxes on it, so it avoids double taxation. Im sure the cc companies would love a return to that.

[PM]

The reason being that recipients of interest had to pay taxes on it, so it avoids double taxation.

Kinda like how corporations have to pay income tax, can't deduct dividend distributions, and then the individuals are taxed on the distribution as well?

[Emmerson Biggins]

ya. bring that back. If interest earned is income, interest payed is a loss.

[PM]

This longstanding incentive... has warped the real estate market and overwhelmingly benefited higher-income Americans, all while failing to achieve its stated policy objection of promoting homeownership.

So a successful policy then.

[Gilbert Martin]

Let's get the economics straight.

There is no such thing as a "tax subsidy"

The only individuals being subsidized by the federal government are those who individual income tax payments on an absolute dollar basis are less than the absolute dollar value of any government services that have provided them with a demonstrable, specific direct benefit calculated on a user fee basis.

Anyone paying more than that is not getting any subsidy and in fact is subsidizing other people regardless of what tax deductions that they may be availing themseles of.

And anyone paying less than that is getting subsidized regardless of whether they own, rent or live in somebody else's house.

[Mickey Rat]

It is another case of a reason writer accepting the Left's premises on an issue, i.e. the state has first claim on a person's income.

[sarcasmic]

A subsidy is taking money from one party and giving it to another.

Allowing people to keep their own money is not a subsidy.

Unless you're like Tony and feel that not taking is giving and not giving is taking.

[HazelMeade]

True, but taking from some people and not others is unfair. If you're going to take, take an equal amount from everyone. Don't exempt certain special people from the taking.

[sarcasmic]

For a moment I thought that was a joke, until I looked at the source.

[Drake]

The WSJ article is subscribers only but I doubt the premise. The high earners buying large houses are probably hitting the Alternative Minimum Tax. The AMT phases out these kinds of deductions to the point that they no longer a consideration.

Low interest rates probably have more to do with big houses. When interest rates go up, the housing market is going to crash again.

[Swiss Servator, mehr Spr?ngli]

Not to worry, SuperFairness Man will get right on that...as soon as he finishes some unilateral job destroying measures that is.

[Citryphus]

And what kind of evil shit is the standard deduction subsidizing?

[Fluffy]

The reason the mortgage interest deduction isn't "encouraging homeownership" is because you have to itemize to TAKE it.

And most people with incomes below $80k or so end up being better off taking the standard deduction.

The tax policy would probably work more as designed if it was a straight-up deduction that every homeowner could take, regardless of their standard deduction math. Or, at least, the benefit of it would be distributed down, and away from the UMC.

[John]

There is that and there is the fact that people factor in the benefit of the deduction in what they are willing to pay for a house. Take away the deduction and the price of housing would come down as people could afford less.

All the deduction does is allow people to spend more on housing and thus artificially raise the price of houses. Everyone stays exactly where they are relative to other potential home buyers. So it does nothing to "encourage home ownership".

But it makes up for that by discouraging people from saving and investing. Since home ownership is the only tax shelter available to the middle and upper middle class, people rationally choose to buy homes and accumulate their wealth in equity instead of saving and investing.

The very same people who bemoan how decadent Americans don't save like the thrifty Asians will often support the home mortgage deduction. Yes, people really are stupid.

[HazelMeade]

This.

Also, even if you have a mortgage, the standard deduction is still larger unless you have a house big enough that you're paying the standard deduction in interest on it every year.

There's effectively no benefit at all if you have a small or inexpensive home.

[John]

But if you live in a state that has income taxes, you can write off your state income taxes. Between the state income tax deduction and the mortgage deduction, you would have to have a pretty small mortgage not to get over the standard deduction.

Indeed, one of the many second order effects of the deduction is that encourages people to take out mortgages even when they don't have to or for more money than they otherwise would. Lots of people have enough savings to make a pretty substantial down payment on a house but choose instead to borrow the max because they don't want to lose their mortgage deduction. If you were cynical, you would think the bankers intended this or something.

[HazelMeade]

Well, a condo would probably be small enough. Also depends on how many people are in your household.

[John]

And don't forget Hazel, if you can get one dollar over that standard deduction, then you can take all your itemized deductions. If you take the standard, things like charitable donations and unreimbursed work expenses don't get deducted. Usually, people don't track that stuff until they get over the standard deduction.

[GroundTruth]

Flat tax is the only way to kill the leviathan. With a high standard deduction (20K per person for example) if that is what is required to make it happen politically.

(Personally, I'd have a minimum tax of about 3K per beating heart, on the premise that protecting life and liberty has nothing to do with one's income. Sort of life the "Air Tank" in Heinlein's 'Cat Who Walks Through Walls'. Realistically, that won't fly, so let's get something that might be possible.)

[John]

The flat tax is the best solution in the long run. The problem is that killing the home mortgage deduction is going to be very painful. A lot of people who can afford their mortgage now could not if they lost the deduction. Further, get rid of the deduction and home prices will fall since people will no longer factor in the deduction in the price they are willing to pay.

Both of those things would be good in the long run. But they would cause a huge amount of pain in the short run to a lot of very powerful groups. Thus, a flat tax is likely never to be enacted.

[HazelMeade]

That's why you increase the standard deduction.

Once everyone is taking $20K standard, there will be way fewer people taking itemized deductions and hence fewer people taking the home mortgage interest deduction.

Which makes it politically much easier to get rid of.

[John]

That is a good way to do it. But you could never eliminate it that way. And you would just make it into an even more upper class entitlement.

[HazelMeade]

Does it really matter if everyone else is getting a bigger standard deduction too?

[John]

Sure it does. It would mean that rich people are paying less taxes. And that matters to some people. Also, the bigger standard deduction would just make it so even fewer people actually paid federal income taxes. I am not sure that is a good thing.

[Emmerson Biggins]

If we absolutely had to get rid of it, it should be phased out of 31 years. I.e. this year you still get it all. Next year you get 29/30ths of it, the year after that 28/30ths, etc. At least give the people who depend on it time to earn their way out of it or exit gracefully.

[HazelMeade]

There's a kind of discrepancy in the tax code in that businesses are taxed on their profit, but individuals are taxed on their gross.

Unfortunately, if you were to tax individuals on profit, you would also fail to account for the fact that some individual will rent a more expensive apartment and opt to live at a higher standard of living. That would penalize people who choose to live within their means and save.

Fortunately, the tax code already has a mechanism to effectively let people deduct a nominal amount for living expenses. It's called the "standard deduction". The whole point of which is to say that for yourself and each additional individual in your household you get to deduct a set amount which is the presumed cost of living per person. Then your income *above* that point, which you presumably spend on additional luxuries, or put into savings is the only thing that gets taxed.

The problem is that the standard deduction hasn't really been updated to reflect the *genuine* cost of living. It's gotten to be an absurdly low number. You couldn't live on it even in the poorest parts of the country.

If you want to clean up the tax code and get rid of the hodge-podge of deductions, start by increasing the standard deduction to a rational level, at least to the poverty line, preferably to a lower-middle-class threshold.

[Citryphus]

Most Americans don't itemize, presumably because the standard deduction is larger. Isn't the standard deduction therefore a rather generous minimum estimate of Schedule A deductions?

[jdgalt]

While we're at it let's also take away the tax exemption for gain on the sale of a home.