Kill the Farm Bill

PhDeac said:

I do, which is why we got started on this discussion in the first place.

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Ha. Fair enough. Just don't think the bottom of the market is the right time to do it.

Well said, 923. You're rapidly becoming one of my favorite posters.

I'll add that in terms of straight up cash being spent on a mortgage, prices are low anyway. The argument that people wouldn't buy homes because of the interest artificially driving costs even lower is ridiculous. "Nah, I'm not going to buy that home that dropped in price $50K over the last 6 months because there's no interest deduction."

TR, I guess I'm saying that the bottom is the best time to do it. The effects would be less now than "when" the market rebounds in the next 10-20 years. And even so "when" that rebound happens, people who bought now even without a deduction would be sitting on a good amount of equity anyway.

Deacon923 said:

that back and forth between you two was kind of surreal.

I think the argument that we can't end the deduction because it will be bad for the economy is significantly countered by the example of Britain and Australia (maybe it was Canada instead of Australia, too lazy to google) that had the deduction and phased it out in relatively recent years. Neither one of them had any significant adverse economic consequences and both of them have homeownership rates comparable to the US and similar to the rates before the phase out.

No matter when you do it or how you do it, the Realtors lobby is going to scream bloody murder and claim it will wreck the economy. That's nonsense for two reasons: first, it would be a phase out, not a cold turkey cutoff. People that bought their homes relying on the deduction should be able to keep it for some period of time until it gradually phases out. Second, it would have to be done as part of a comprehensive reform that would lower rates and make the whole package revenue neutral - if for no other reason than that it could never pass otherwise. Under those circumstances I just don't see how ending the deduction would be the big catastrophe that the Realtors and mortgage brokers make it out to be.

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Bingo.

PhDeac said:

Well said, 923. You're rapidly becoming one of my favorite posters.

I'll add that in terms of straight up cash being spent on a mortgage, prices are low anyway. The argument that people wouldn't buy homes because of the interest artificially driving costs even lower is ridiculous. "Nah, I'm not going to buy that home that dropped in price $50K over the last 6 months because there's no interest deduction."

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The worry isn't that people won't buy homes, the worry is that people will go underwater on their mortgages, which is a substantial risk, especially for those who can barely make their payments as it is.

TR1982 said:

The worry isn't that people won't buy homes, the worry is that people will go underwater on their mortgages, which is a substantial risk, especially for those who can barely make their payments as it is.

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The National Association of Realtors is definitely more worried about people not buying homes.

TR, interest rates are low. Home prices are low. Do we really need government coupons to get people to buy more houses? Phase it out now.

Actually, I think if it is phased out over 10 years for people who buy by December 31, 2013, that would do more to spur home sales than having it in the first place.

Deacon923 said:

that back and forth between you two was kind of surreal.

I think the argument that we can't end the deduction because it will be bad for the economy is significantly countered by the example of Britain and Australia (maybe it was Canada instead of Australia, too lazy to google) that had the deduction and phased it out in relatively recent years. Neither one of them had any significant adverse economic consequences and both of them have homeownership rates comparable to the US and similar to the rates before the phase out.

No matter when you do it or how you do it, the Realtors lobby is going to scream bloody murder and claim it will wreck the economy. That's nonsense for two reasons: first, it would be a phase out, not a cold turkey cutoff. People that bought their homes relying on the deduction should be able to keep it for some period of time until it gradually phases out. Second, it would have to be done as part of a comprehensive reform that would lower rates and make the whole package revenue neutral - if for no other reason than that it could never pass otherwise. Under those circumstances I just don't see how ending the deduction would be the big catastrophe that the Realtors and mortgage brokers make it out to be.

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Did they do it at a time when 20% or more of the homes were already underwater?

Was 15%+ of the GDP based on the housing market?

Deacon923 said:

that back and forth between you two was kind of surreal.

I think the argument that we can't end the deduction because it will be bad for the economy is significantly countered by the example of Britain and Australia (maybe it was Canada instead of Australia, too lazy to google) that had the deduction and phased it out in relatively recent years. Neither one of them had any significant adverse economic consequences and both of them have homeownership rates comparable to the US and similar to the rates before the phase out.

No matter when you do it or how you do it, the Realtors lobby is going to scream bloody murder and claim it will wreck the economy. That's nonsense for two reasons: first, it would be a phase out, not a cold turkey cutoff. People that bought their homes relying on the deduction should be able to keep it for some period of time until it gradually phases out. Second, it would have to be done as part of a comprehensive reform that would lower rates and make the whole package revenue neutral - if for no other reason than that it could never pass otherwise. Under those circumstances I just don't see how ending the deduction would be the big catastrophe that the Realtors and mortgage brokers make it out to be.

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How long? Most people have thirty year mortgages. A phase-out sounds nice, but that's still thousands of dollars out of pocket every year. Just because you're phasing it out that doesn't mean it isn't going to hit people hard.

TR1982 said:

How long? Most people have thirty year mortgages. A phase-out sounds nice, but that's still thousands of dollars out of pocket every year. Just because you're phasing it out that doesn't mean it isn't going to hit people hard.

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Actually most people have less than 30 years left on their mortgages because the 30 year mortgage is the standard (which is ridiculous in itself anyway).

So what if the deduction is phased out over 10 years? That would just encourage people to pay off their homes before the deduction is phased out. That's good.

So fewer people who can't afford a mortgage will get one after the deduction is eliminated for new loans? That's good.

Deacon923 said:

that back and forth between you two was kind of surreal.

I think the argument that we can't end the deduction because it will be bad for the economy is significantly countered by the example of Britain and Australia (maybe it was Canada instead of Australia, too lazy to google) that had the deduction and phased it out in relatively recent years. Neither one of them had any significant adverse economic consequences and both of them have homeownership rates comparable to the US and similar to the rates before the phase out.

No matter when you do it or how you do it, the Realtors lobby is going to scream bloody murder and claim it will wreck the economy. That's nonsense for two reasons: first, it would be a phase out, not a cold turkey cutoff. People that bought their homes relying on the deduction should be able to keep it for some period of time until it gradually phases out. Second, it would have to be done as part of a comprehensive reform that would lower rates and make the whole package revenue neutral - if for no other reason than that it could never pass otherwise. Under those circumstances I just don't see how ending the deduction would be the big catastrophe that the Realtors and mortgage brokers make it out to be.

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Exactly

PhDeac said:

Actually most people have less than 30 years left on their mortgages because the 30 year mortgage is the standard (which is ridiculous in itself anyway).

So what if the deduction is phased out over 10 years? That would just encourage people to pay off their homes before the deduction is phased out. That's good.

So fewer people who can't afford a mortgage will get one after the deduction is eliminated for new loans? That's good.

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Again, I don't know where people got the idea that just because something is being "phased" out that doesn't mean it isn't going to have a tangible effect on your bottom line. So it happens a little bit every year for ten years. So what. That still means hundreds of dollars are being added to your monthly payment every year. What happens when people who are on a tight budget aren't able to pay their interest anymore? You get a much higher rate of delinquency, and I think we all know the ramifications that can have for the economy as a whole. That's not even taking into effect that the increased taxes have on consumption.

TR1982 said:

How long? Most people have thirty year mortgages. A phase-out sounds nice, but that's still thousands of dollars out of pocket every year. Just because you're phasing it out that doesn't mean it isn't going to hit people hard.

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This is only true if you assume that everything else about the tax code stays the same and the only thing that is dropped is the mortgage deduction. That is just never, ever going to happen. The only way this deduction will go away is as part of a tax reform that removes many deductions in exchange for lowering rates overall, so that the out of pocket impact on most homeowners will be pretty minimal. There is no other way it could pass, so the argument that it will "hit people hard" with thousands out of pocket is essentially a straw man.

TR1982 said:

Again, I don't know where people got the idea that just because something is being "phased" out that doesn't mean it isn't going to have a tangible effect on your bottom line. So it happens a little bit every year for ten years. So what. That still means hundreds of dollars are being added to your monthly payment every year. What happens when people who are on a tight budget aren't able to pay their interest anymore? You get a much higher rate of delinquency, and I think we all know the ramifications that can have for the economy as a whole. That's not even taking into effect that the increased taxes have on consumption.

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Wouldn't it actually mean that hundreds of dollars are taken out of your tax return?

lets say a couple lives in NC and makes $120k a year. they will pay about an avg. 7% rate to NC and an avg. rate of 19% to the US govt without any deductions. the standard deduction they receive is $11900.

With a 200k (current balance) mortgage at 5% they pay around $10500 in interest every year. if this happens to be there only deduction (and it probably isnt) then they get no benefit from the mortgage interest deduction. if for some crazy reason they have $11900 of other deductions and can actually claim the $10500 in deductions they save $2730 in taxes (19%+7%=26% times $10500).

If this same couple refinances today (3.75% for 30 years) they would end up paying $7500 in interest every year. in the same scenario with no tax benefit above the standard deduction they save $270. if the tax deduction is in place, they would get about $2000 of tax benefit.

so $2k in tax benefits AT MOST (as long as they are smart enough to take advantage of the crazy low rates out there) would be lost from this couple if they have other deductions up to the $11900. people that have those type of deductions usually dont make only $120k a year.

long winded post but the point is, the mortgage interest benefit really isnt that great in today's environment.

Deacon923 said:

This is only true if you assume that everything else about the tax code stays the same and the only thing that is dropped is the mortgage deduction. That is just never, ever going to happen. The only way this deduction will go away is as part of a tax reform that removes many deductions in exchange for lowering rates overall, so that the out of pocket impact on most homeowners will be pretty minimal. There is no other way it could pass, so the argument that it will "hit people hard" with thousands out of pocket is essentially a straw man.

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I mean, I guess. I just thought we were talking about the mortgage interest rate deduction. Not some hypothetical all encompassing tax reform.

PhDeac said:

Wouldn't it actually mean that hundreds of dollars are taken out of your tax return?

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Yeah, but "hundreds of dollars being added to your monthly payments" sounds better, doesn't it?

TR1982 said:

I mean, I guess. I just thought we were talking about the mortgage interest rate deduction. Not some hypothetical all encompassing tax reform.

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Well, we actually started out talking about the farm bill. But you are inadvertently making a larger point about our current political system. Once a tax break or entitlement is enacted, any future discussion about whether the item is still a wise policy is met with some variant of "you can't change that tax break, it will wipe out the middle class/job creators/mushroom farmers!!!1!1!!" or "you can't take away that entitlement, THINK OF THE CHILDREN!!!1!!!1!". this overwhelming din from the special interest rent-seekers who rely on this particular deduction drowns out any thoughtful discussion about how a functioning legislature could fix the policy problem with a balanced solution.

Dented said:

lets say a couple lives in NC and makes $120k a year. they will pay about an avg. 7% rate to NC and an avg. rate of 19% to the US govt without any deductions. the standard deduction they receive is $11900.

With a 200k (current balance) mortgage at 5% they pay around $10500 in interest every year. if this happens to be there only deduction (and it probably isnt) then they get no benefit from the mortgage interest deduction. if for some crazy reason they have $11900 of other deductions and can actually claim the $10500 in deductions they save $2730 in taxes (19%+7%=26% times $10500).

If this same couple refinances today (3.75% for 30 years) they would end up paying $7500 in interest every year. in the same scenario with no tax benefit above the standard deduction they save $270. if the tax deduction is in place, they would get about $2000 of tax benefit.

so $2k in tax benefits AT MOST (as long as they are smart enough to take advantage of the crazy low rates out there) would be lost from this couple if they have other deductions up to the $11900. people that have those type of deductions usually dont make only $120k a year.

long winded post but the point is, the mortgage interest benefit really isnt that great in today's environment.

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More to the point, it overwhelmingly benefits people who need it the least. It doesn't help the poor one bit and it does very little for the middle class. 75% of the dollars spent by taxpayers on this giveaway go to the top 20% of earners, people who make over $100,000 a year. Less than 5% of the deduction money goes to people in the bottom 56% of earners, and only 20% goes to people in the middle (who make between $50,000 - $100,000). http://www.theatlantic.com/business/archive/2012/07/why-the-mortgage-interest-deduction-is-terrible/259915/

I'm sure that those top 20% are all "job creators" who need all the help they can get but surely we can find a way to help them that is more efficient and creates less distortions than this.

Deacon923 said:

More to the point, it overwhelmingly benefits people who need it the least. It doesn't help the poor one bit and it does very little for the middle class. 75% of the dollars spent by taxpayers on this giveaway go to the top 20% of earners, people who make over $100,000 a year. Less than 5% of the deduction money goes to people in the bottom 56% of earners, and only 20% goes to people in the middle (who make between $50,000 - $100,000). http://www.theatlantic.com/business/archive/2012/07/why-the-mortgage-interest-deduction-is-terrible/259915/

I'm sure that those top 20% are all "job creators" who need all the help they can get but surely we can find a way to help them that is more efficient and creates less distortions than this.

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That breakdown completely ignores the extent to which the lower and middle earners you have cited would be affected by ending the deduction. In effect this would change the terms of the mortgage after it has been agreed upon. The effect could be devastating to those who are making their payments but have little margin for error. $1,000 doesn't mean much to a rich person but it means a whole hell of a lot to a poor or middle class person. Ending the deduction when so many people are fighting to hold on would be unfair and wrong.

Now, if you want to talk about comprehensive tax reform with lower rates and fewer/no deductions, that's a different story.

wfumike02 said:

That breakdown completely ignores the extent to which the lower and middle earners you have cited would be affected by ending the deduction. In effect this would change the terms of the mortgage after it has been agreed upon. The effect could be devastating to those who are making their payments but have little margin for error. $1,000 doesn't mean much to a rich person but it means a whole hell of a lot to a poor or middle class person. Ending the deduction when so many people are fighting to hold on would be unfair and wrong.

Now, if you want to talk about comprehensive tax reform with lower rates and fewer/no deductions, that's a different story.

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This is exactly what I have been talking about in all my prior posts. I am trying to engage in a policy analysis here: Step 1: Is this a wise policy for America (does it do what it is supposed to do? Does it distort the economy? Do the benefits outweigh the cost?). Step 2: If we enact/change this policy, will there be unintended/negative consequences? Step 3: How do we enact the wise policy and minimize the negative consequences?

I am trying to avoid the typical American political system method of "analysis", which is : Step 1. Someone wants to the change the policy. Step 2. People who benefit from the policy (and who vote like me) would be hurt, so I disagree.

923 is running things. I'm going to chime in to say that and let him work.

BSD, his point has an inherent problem in that other countries who phased it in didn't start doing so during a time of high unemployment and housing price deflation.

If we were at 5% unemployment and growing home prices, his point would have more merit. At this point in time it will do much more harm than good.