******************** THIS BLOG HAS MOVED TO WWW.LEGALINSURRECTION.COM ********************

This blog is moving to www.legalinsurrection.com. If you have not been automatically redirected please click on the link.

NEW COMMENTS will NOT be put through and will NOT be transferred to the new website.

Wednesday, November 10, 2010

Innovative Solution To Cut Deficits - Crater The Housing Market and All The Banks

The commission headed by Alan Simpson and Erskine Bowles to find ways to cut deficits doesn't put it the way I do in the title, but one of their proposals may have that effect.

The proposal, which  may not get enough votes to make it to Congress, is to end the tax deduction for home mortgages.  As reported by The New York Times:
The proposed simplification of the tax code would repeal or modify a number of popular tax breaks — including the deductibility of mortgage interest payments — so that income tax rates could be reduced across the board. Under the plan, individual income tax rates would decline to as low as 8 percent on the lowest income bracket (now 10 percent) and to 23 percent on the highest bracket (now 35 percent). The corporate tax rate, now 35 percent, would also be reduced, to as low as 26 percent.
In an ideal world, it would make sense to have lower income tax rates and fewer deductions, a much more simplified system which would encourage people to be productive by lowering the cost of earning money.

But we do not live in an ideal world.  We live in a world in which residential real estate has been priced based on the availability of tax-deductible mortgages.  Remove that favored treatment for home ownership and housing prices will adjust downward, significantly. 

Limiting the change to higher value homes would not really help, because it is that segment of the market which is most dependent on the mortgage interest deduction.

To make such a change now, even if phased in, very likely would take down the banking system, which is struggling with an inventory of bad mortgages and under-water homeowners.

Simpson and Bowles may be right, they're just decades too late.

Follow me on Twitter, Facebook, and YouTube
Bookmark and Share


  1. It seems like there are a lot of "bombs" or "millstones" buried in the tax code and in all kinds of legislation that have been in place for years.

    I'm one of those people who has no real understanding of finance (which is probably why I'm poor). But wouldn't the solution to these things be to enact, say, a 2% per year phase-out of such things? (I'm not talking about what would be politically possible, but what would be economically least damaging.) If they should be gotten rid of, and can't be gotten rid of all at once, shouldn't a gradual phase out be the solution? I often think this is the way to handle lots of social service bureaucracies as well -- if you zero them out you'd cause enormous suffering, but if you very slowly dissolved them the private charitable sector and local governments could adjust.

  2. This was my first thought when I read this stupidity, the destruction of the housing market, just when it is about to recover. But as many theorize, Obama wants to destroy the American economy and make us subservient to the rest of the world. It would also be his way of redistributing income and making us all equal. He wants to destroy the one investment that people have thereby making us all poverty stricken,and dependent on government largess for our survival.

  3. The AMT and $1M cap already limit benefits of the home mortgage deduction for higher income brackets, so I don't think this would impact "the rich" as much as some might think. The fallacy, of course, is that the home mortgage deduction would be dropped in favor of simpler, lower tax levels. The latter, we know, will never happen.

  4. Much as I disagree with President Obama on about every issue he is not directly to blame on this. The blame belongs to Congress and goes back 30 years or more. Congress has inflated bubble after bubble and repealed good legislation and replaced it with bad. President Obama is in the uneviable position of trying to save his friends (banks, unions, "green industries" trial lawyers etc) and protect the entitlement system and the mentality it has bred. He is trying to do this at the least possible cost to his friends (who aren't really the friends of most of us). Congress (both parties) has enabled this process (actually done most of the heavy lifting) and where we might have had to (metaphorically) amputate a finger a few years ago, now we lose a leg. We better hurry before it gets worse. Don't forget the "Republican" president and their then standard bearer jumped aboard the TARP bandwagon which started the hysteria that Congress has fed on. I think the real problem is that Congress has decided that it can repeal the business cycle and mandate perpetual growth without recessions (once viewed as a necessary if painful correction, now seen as completely evil) or any downturn in growth. I am hoping the new congress is made of smarter, sterner and more honest stuff than the old one....

  5. I dunno...it depends on the standard deduction. I owned a home for a number of years (I sold in 2006), but the last several years I just took the standard deduction because the interest and other deductibles I could take was a smaller amount than the standard deduction.

    Maybe if you're married and with a boatload of kids, and lots and lots of extra deductions it makes it worthwhile, but as long as $STANDARD > $ITEMIZED, it doesn't matter.

  6. "...they're just decades too late."
    and more's the pity that this applies to so many of the solutions to our current problems.

    BTW - did anyone expect that this group would really come up with a real answer that would work in the real world?

    And...what would it take to exit the minefield of deductions and credits to flatten the tax code and create a more workable tax structure?

  7. There can be phased reductions. It doesn't have to come in one big bite. However, a simplified (and even -- FLAT) tax structure is to everyone's benefit eventually.

  8. Per previous commenters, this should be phased in. In addition or alternatively, it should be deferred to the upside of the housing cycle, and grandfathered in to minimize the damage to people who bought homes in good faith under the current system's incentives. A reduction in the resale value of my house is less severe than a rise in my taxes.
    WAJ, best wishes to you, and to your wife for a speedy and full recovery.

  9. This is no different than a school board telling you,"if we can't raise your taxes, well...gosh...(insert favored extracurricular program here) will have to be cut. Amazing how quickly the taxpayers fall for that one. It is easier to do this and go our merry way than to make the hard choices.

  10. I'm thinking now is the perfect time to screw the housing market. It's already a mess, so why not break the deduction link now.

  11. Regardless to whether or not they eliminate the mortgage interest deduction, home prices are still far too high. Were the government to get out of the way and allow the markets to find the real bottom, on average home prices across the country would probably sink another 15-25%. Eliminating the tax deduction would not have a lasting effect. The net benefit to the home owner would be the same.

    We absolutely must learn to do the right things for the right reasons and buying a home for the tax deduction is the wrong reason. So is buying a home for short-term appreciation. Besides, they are talking about phasing it out over time and adjusting the tax rate to offset the tax hit.

    This is an excellent example for why I have little hope that even the most strident Tea Party conservatives will be willing to support the changes that are needed. Everyone wants to balance the budget, shrink the size of government and shrink the deficit on someone else's dime. Suddenly, we don't look much different than the French people we are always mocking.

  12. One cannot look a these suggestions as suggestions. They are cover for the real agenda, which is: raise taxes, grow government, limit true freedom, restrict liberty, legislate equality of outcome and empower the bureaucracy.

    This is the classic gambit of presenting an outrageous and extremely unpalatable "choice" to force us to accept something less severe. And to get us to think we're getting a 'deal' by accepting something less grotesque. If we were to be presented with the "less grotesque" item as a stand alone, we'd summarily reject it for the affront it is.

    All we'd have to do to solve our debt and deficit problem would be to cut the operating budget of the Federal Government by our shortfall, over a set period, say 1 Senate term. Really, we're spending 1 trillion more than we raise in taxes...well, looks like we'll have to eliminate Energy, Education, HHS, NPR and 75% of Congressional and Executive staff.

    That'd solve that.

    Nothing spared.

  13. I believe they came up with a variety of proposals respecting the mortgage credit. I agree with you that now is not the time to stop it, but one of the proposals sounds right--deny it for second homes or homes over $500k.

  14. I think cf is right. The quote is "repeal or modify" and if you look into the document, I think they're only saying modify to eliminate second homes and mortgages over $500k.

    I've thought for a while that the deduction should only be for interest on loans up to the median housing price. Should we really be subsidizing people buying million dollar homes?

    While the deduction encourages homeownership, it seems to be a way of funneling money from low-cost-of-living areas of the country to high-cost-of-living areas, much like the state income tax deductions. It also seems to subsidize people who buy a lot more house than they need.

    The only reason we itemize most years is because of our charitable giving. If the mortgage deduction were the only thing we itemized, we'd have to have a huge mortgage to require it.

  15. "Much as I disagree with President Obama on about every issue he is not directly to blame on this."

    Oh, really? He voted for TARP, helped the dems stonewall Bush admin reforms of Freddie and Fannie and sued banks when he was a "community organizer" for not engaging in subprime mortgages. He is just as much directly involved as anybody.

    And remember, as originally set out, TARP was only meant to give out money to 'troubled' banks, it's Obama who turned it into the political tool it is today. (Same with the auto bailouts.)

  16. So, your solution is to do nothing and just continue the status quo? Even if I buy your doomsday scenario, so when should do what needs to be done? Ten years from now? Then people will find other reasons not to have it done. It's just an endless crippling cycle. Maybe the housing market could use a little cratering actually.

    C'mon, a little courage here.