I keep finding very poor or misleading reporting on Housing in the US. Some of this is sloppy or lazy reportage; others reflect reporters being suckered by Think Tank spin.
Lately, I have been reading misleading coverage of the Mortgage Interest Deduction. The impression that gets conveyed is that this deduction was a specific policy designed to encourage home ownership. That is a false narrative, belied by history of the Federal Income tax.
Let’s take a very quick look at that so people understand it better.
The first Federal income tax in the US was passed in 1894, and subsequently struck down by the Supreme Court. This led to the passage of the Sixteenth Amendment (ratified in 1913), that empowered Congress “to lay and collect taxes on incomes, from whatever source derived.”
So with this power, Congress imposed the first taxes. Rates started at 1%, and rose to a whopping 7% for taxpayers with income in excess of $500,000. Less than 1% of the population paid income tax.
As an offset for the taxes, any interest paid for any reason was deducted. It was considered a business expense. Indeed, taxes on rents from real estate was a large income source. The financing costs of purchasing such rent producing property — aka interest payments — was a ordinary business expense, and hence, deductible.
Keep in mind that during the pre-WW1 period, there was very little interest expenses paid by individuals. Home owners typically owned their houses outright (except for farmers, who either financed or leased the land). There were no credit cards, HELOCs, revolving credit, or student loans.
The deduction on interest was never intended to be a salve to the middle class. It was not designed to encourage home ownership. Indeed, when the interest rate deduction was first considered, home financing was non-existent, and home ownership was not thought of as a public policy. It is not part of a grand scheme.
The entire home mortgage deduction is little more than a historical anachronism, a carry over from when all interest payments were deductible
Now you know . . .
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Previously: Housing: Still Widely Misunderstood (August 24, 2010)
See Also: History of the U.S. Tax System http://www.ustreas.gov/education/fact-sheets/taxes/ustax.shtml
Who Needs the Mortgage-Interest Deduction? ROGER LOWENSTEIN NYT, March 5, 2006 http://www.nytimes.com/2006/03/05/magazine/305deduction.1.html
Defending the Mortgage Interest Deduction Realator.com http://www.realtor.org/government_affairs/mortgage_interest_deduction
Good stuff.
P.S. I also think you would be well served to apply the same kind of long term historical perspective to your economic and stock market analysis.
Mark, you must be new around here.
Over the past 7 years, there have been 100s of posts looking at exactly that.
Technicals
Valuation
Markets
Economy
Employment
Take this and the other 14,999 pages of the tax code away and introduce a flat tax. The only problem would be that everyone would be able to complete and submit their own tax returns, which would put millions more out of work in both the Government AND private sectors. Efficiency?
Well this was certainly interesting info. But it doesn’t explain how it came to pass that interest expenses lost their deductability (for individuals) – except for interest on mortgages.
They slowly were chipped away over time. Credit cards years ago; Reagan tossed the deductability of student loans, others similarly fell.
Removing the mortgage interest tax deduction would be the biggest tax increase on the middle class in history. Its political suicide for any pol who tries to take it away, and thats why we hear it from think tanks and panels "” never from those running for office.
@philip: Great point. Take away that complexity in most of our industries today, and half the population would be out of work. There wouldn’t be enough “work”, at least in the short and mid term.
Philipat,
Agreed that taxes are a fucking mess wrapped in a fucking mess, but let’s raise the level of intelligence a bit.
Taxes have three basic parts: 1) Calculate income for the purpose of taxation 2) Convoluted rules for the purpose of social engineering, 3) Prevent scammers from using 1 and 2 in such a way that income disappears and is nontaxable.
People such as yourself look at 1 and 2 and beg for more simplicity. Trickle down economics enthusiasts salivate over the new scams that will flourish to make income disappear if a flat tax is created. Point 3 exists to make things more difficult for thieves and we all pay for it. That won’t change under a flat tax. Out of necessity, a lot of unintelligible complex rules will arise to prevent new and creative tax scams.
For example, will depreciation go away? If so, then the concept of basis goes away and so do capital gains and losses. Will income be made to disappear by making like-kind sales so you can continually write off newly acquired business assets? Will passive loss schemes arise again so massive passive losses can be ginned up, soak up real income, and them mysteriously be turned into capital gains? I think so.
As long as we have politicians, the tax code will be a fucking mess or a give-away to the rich or both.
@dh: I think it’s always both.
Simplification has never, ever, been the goal or motivation for anyone advocating change in tax policy. The serious Money wants it complicated and complicate it shall remain. As for a flat tax, I'll agree as long as it is a tax on wealth; not on income or consumption. Any takers?
Though it was not intended to encourage home ownership, I favor retaining the exemption on mortgage interest because I think home ownership should be encouraged. Home owners have a greater stake in their community and that is desirable.
The entire home mortgage deduction is little more than a historical anachronism, a carry over from when all interest payments were deductible….. the mortgage deduction is a holdover from the 1986 tax changes when all other interest deductions went away
Philipat,
For your reading pleasure, here are just a few areas of tax law that are simple in concept if you look at them from 100,000 feet. But all exist in detail to prevent people from hiding income and, thus, are complex only to prevent scammers from pushing the tax burden onto those who can’t hide income as well. Scammers make the following an unintelligible mess:
How about: The always popular related party transaction, passive losses, at risk amounts (you can’t write off more than you invest), installment sales, depreciation recapture, trusts, like-kind exchanges, gifting strategies, just to start. Was that thing you gave to charity a valuable piece of art or only a red brick with a happy face painted on it? Most of the rules in these areas are to prevent income from vanishing. Blame the thieves for this shit.
Agreed that politicians make simple things like IRAs nearly unintelligible. If you combine social engineering with tax law, you have a multitude of definitions for ‘adjusted gross income’. It’s all contextual.
Taxes suck royally, but a lot of why they suck so bad has to do with craven politicians and crooks. A flat tax will only create new problems. What we need is a wall for a few to step in front of, metaphorically speaking.
Personal Income is a no-brainer. Everything you make, except in the “Cash/Shadow” economy is at least double reported.
For Corporations, if the US were to introduce a Value-added tax instead of Sales Tax, the IRS would be able to focus its super-computers on calculating revenues and, therefore, by industry norms/comparisons, expected tax receipts for each Corporation. Corporations would be totally honest about VAT collected because it would be offset against VAT paid to suppliers, therefore paying tax only on the net value added.
Most US Corporations have a net tax rate of below what Mr and Mrs High Syreet pay because most of the profit is transfer priced through tax havens.
SO, yes, let’s raise the intelligence level a bit. Flat tax anyone?
philipat Says: August 25th, 2010 at 10:02 am
Personal Income is a no-brainer. Everything you make, except in the "Cash/Shadow" economy is at least double reported.
SO, yes, let's raise the intelligence level a bit. Flat tax anyone?
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