_PRORATE_ the "Home Mortgage Interest Deduction"

I was watching the National News tonight, when I heard a story about eliminating the home mortgage deduction.
Some people are proposing an alternative of just lowering the deduction's limit from $1,000,000.00 to something on the order of $200,000.00.
( FFI, see URL: http://en.wikipedia.org/wiki/Home_mortg ... ted_States )

Either alternative, of just cutting it out completely or lowering to some arbitrary number seems to be counter-productive to me.

Why don't they discuss prorating it?

Here's one sample set of numbers:
100% $ 1 up to $ 99,999
90% $100,000 up to $199,999
80% $200,000 up to $299,999
70% $300,000 up to $399,999
60% $400,000 up to $499,999
50% $500,000 up to $599,999
40% $600,000 up to $699,999
30% $700,000 up to $799,999
20% $800,000 up to $899,999
10% $900,000 up to $999,999
0% greater than $1,000,000

And...
Tie the percentage of deduction to the official rate of inflation, so the $100K and $1M numbers move with the annual inflation (or deflation) rates.

Example:
For someone who purchased a $350,000 home, would get:
100% on dollars $1 to $99,999,
90% on dollars $100,000 to $199,999,
80% on dollars $200,000 to $299,999 and
70% on dollars $300,000 to the purchase price of $350,000.

OK, so the numbers are up to negotiation.
It seems to me however, that nobody's talking about this simple, time tested way to make the "medicine" easier to swallow.

While my fixer-upper and power tool collection are covered under darn near any mortgage interest deduction proposal, many people aren't so lucky. In major metropolitan areas, home prices above half a million dollars aren't uncommon. We're not talking McMansions, we're taking medium-sized single family homes all the way down to a decent townhouse.

That deduction is built into the cost of all those homes. Right now everyone 'knows' that you'll get over half of the mortgage payment back as a tax deduction for the first couple of years. Let's say you buy that $500,000 home with a 3.5% interest loan, 30 year repayment. You pay $2245 a month, 26,940 a year on the mortgage (Not touching taxes and such, which could add another thousand a month). $17,347 of that is interest on your loan. That's not a credit mind you, but your theoretical homeowner will be in the 31% federal income tax bracket in 2013. They'll get $5,377 off their taxes for buying a home, or about 20% of their mortgage payments.

If that deduction goes away, demand doesn't change, but home prices have effectively risen by 20%. Let's see, when was the last time home prices were 20% over market value and adjusted to compensate was... oh. Right. I saw it coming and made out like a bandit, but most peoples' 401k plans weren't so fortunate. Of course, thanks to that I also have about three times the liquid assets to play with these days...

You know, I'm firmly in favor of eliminating the mortgage tax deduction altogether! Let's do it again! Short the Dow and break out the champagne!

Although not an american, i have to agree with that bit about how expensive central house prices are. In some 'desirable' suburbs, the average price for a two to three bedroom home, of around 120 to 150 metres squared (1300 to 1600 square feet, on a section of 400 square metres or so (4300 square feet), can be around $650 k New Zealand. add in another $ 10 k or so if its close to top performing schools, and another $20k or so if its close to shopping areas. Add in the fact that they are often sub division style housing, where every house looks the same and is often painted the same, with identical gardens etc. For me? hell no. Living like that reminds me too much of some of those old movies, even as far back as charlie chaplin, where humans are parodied as just a cog in a machine. Where i live is a nice 40 to 50 minute drive to the city outskirts, an hour to the centre, with no traffic to speak of. Our house is 160 square metres, on an acre an a half, and is custom built. As I write this, i am looking out on a quarter acre of native bush, ehich grows around the stream running though our property. we are a five minute drive away from the local town of around 3000 people, and our road is off to the side, so we get little to no traffic. and all this, for only around $700k. Apart from one set of neighbours who have tried to bring the city to the country, everyone on our road has a unique house and section. And they are bigger, better, and not overpriced by real estate agents persuading people that you either live in the city, or you are no one.




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its not paranoia if its justified...
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In Australia we don't have a tax deduction on mortgage interest or payments on your primary residence. We do have it on investment propertys, so the usual advice is to pay your home off as early as possible then take out a separate loan to buy an investment property to rent out.
From the three posts so far our metropolitan prices are possibly higher again. In my case I live inside the city limits of a 100k city, in a big house on 8 acres of pristine bush inhabited by lots of beautiful wildlife. How can I do this? Easy, I bought the land 40 years ago, when unless you lived in a bland suburb you wern't fashionable.

Being forced to live near a major metropolitan area MY fixer-upper is outrageously expensive, so I like the pro-rating idea better than than the cap. The mortgage interest deduction is so politically popular that eliminating it would be suicide for any politician.

And I LOVE:

And...
Tie the percentage of deduction to the official rate of inflation, so the $100K and $1M numbers move with the annual inflation (or deflation) rates.

A perfect auto-fix, to keep the politicians from messing it up.

Now if only someone had thought to index social security to lifespan in 1935....

biochem wrote:A perfect auto-fix, to keep the politicians from messing it up.

I give it three election cycles before they figure out how to break it.....



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its not paranoia if its justified....
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I always thought you kiwis were an overly optomistic bunch. I give it 6 months to break whatever they come up with.

Who you kidding it will be broke before it becomes law. Lawyers and accontants are an intentive bunch, in a way. :-)

Have fun,
T2M

KNick wrote:I always thought you kiwis were an overly optomistic bunch. I give it 6 months to break whatever they come up with.

Granted. But this time to many people from both sides are watching. Most of them are getting to the rope point. Politicians are close to the line were they will become convicted criminals as a group instesd of individuals. The American people have told them to play nice or else.

KNick wrote:Granted. But this time to many people from both sides are watching. Most of them are getting to the rope point. Politicians are close to the line were they will become convicted criminals as a group instesd of individuals. The American people have told them to play nice or else.

Not even close.

There's a quote that I wish I could remember the source for, but I'm very fond of it nonetheless. "Protests are a way for poor people outside the buildings to remind the rich people inside that there's enough of us out here, if we get pissed off enough, to come in there and hang all of you from lampposts. Just something to keep in mind."

Traditionally, that's been the case. At the moment, it's not true by a long shot. Until it really, truly gets to the point where the American public is willing to say, "If you idiots don't start getting your act together and stop trying to destroy the collective economy of the entire world, this time it's not going to be just the poor people who suffer", it will never be true.

One thing that's contributing to the lack of populist revolt is the highly divided political landscape. There are two current schools of thought.

One says that if you give more disposable income to wealthy people, they'll try to become more wealthy still and in the process hire people and stimulate the economy. They'll also buy more yachts, hire more servants, and otherwise create jobs. They're also the people that understand how to create jobs, a skill that most of the population clearly lacks. After all, if they could do it, they'd be doing it already. By giving the wealthy more money, we're handing cash to subject matter experts who understand concepts like reinvestment, building capital, and managing risk to find the best solution.

The other is a similarly Keynesian outlook, but with a distinctly Austrian flavor. There's an old saying that "You can't push a rope." This has been demonstrated increasingly often lately, such as with the Federal discount rate sitting at 0.75% and banks becoming incredibly skittish over lending. You can't *make* banks stimulate the economy. You can't *make* banks work with homeowners to refinance stupid, predatory balloon-payment loans. And you can't *make* someone take a multi-million dollar tax break and hire people at a living wage with it. What you can do is use tax structures to give more money to people at lower income levels, particularly under $75,000 annual household income. Most people in those situations will immediately turn around and spend that additional money (usually on a month-to-month basis), stimulating the economy and bypassing the larger institutions that would otherwise sit at the trough of macro-scale solutions and rake off the benefits before they hit the rest of the economy.

As long as there are two completely opposite viewpoints like this, the momentum for a popular uprising will never happen.