The Mortgage Interest Deduction

I'm no expert on the history of taxation, just someone who fumbles through his own form every April. But it is my understanding that prior to 1986, an interest payment on ANY personal loan was deductible.

That year there was a desire to raise revenues, in a way that wouldn't raise the marginal tax RATE, because supply-sider doctrine focuses on whether the tax rate is going up or down rather than on the question of whether a given taxpayer owes more to the IRS this year than he did last. So in 1986 Congress passed and Reagan signed a bill that removed the interest deduction from any loan. With the important exception of home mortages.

That exception was preserved on the theory that encouraging home ownership is a good thing. Apparently a non-controversial bipartisan notion in the US.

Obama's new budget limits the range of households that can take such a deduction, cutting it off at $250,000.

There is a lot that might be said about this subject. I saw a very interesting letter in the Wall Street Journal in late February. Richard P. Urfer, a fellow from Morristown NJ, wrote that the elimination of interest deductibility for everything except mortgages encouraged the misllocation of capital into housing. He also writes about a tax change [also in 1986?] that allowed tax free profits up to $500,000 on the sale of a primary residence (every two years).

These changes, says Urfer, transformed the home market into "a municipal bond-type investment vehicle." And everybody crowded in, although other sparks were necessary to turn this dry wood into the present conflagration.

Does Urfer's analysis sound plausible to you, dear readers?

At any rate, leaving my own anarchistic views out of account and thinking "within the box" of the current US political system in its broad outlines, I'll say this: there may be a case for abolishing the mortgage interest deduction altogether, completing the work that was begun in 1986. But there is no good case for creating a cut-off line at $250,000.

This is especially obvious if we agree that Urfer is right. If the exception made for mortgage interest in 1986 helped direct speculation into houses, then preserving taht exception but narrowing its scope with an arbitrary income limit won't do anything to prevent another go-round of this sort of boom and bust. All it means is that McMansions won't be part of the next go-round.

It may just mean that the next time there is a housing bubble it will be more intensely focused on middle and lower income housing than the last time. That's an improvement?

What if I were allowed to deduct the interest on payments I made to credit card companies if and only if I had incurred my debts to those companies in order to raise cash to gamble in a casino? The "gaming" industry would love this idea were it politically palatable at all. Would it be a wise policy?

If somehow we found ourselves in that situation and wanted to reform our way out of it, would it make sennse to keep the deduction, but put a household-income ceiling on it?

Be Sure You Guess Right

At a message board where I regulartly go to vent, one of the other venters asked us all the question: "Do you wish you were an oil speculator right now?"

I do. Oil's gone from the mid-high 140's to 115. Someone's getting really rich off of this.

The big swings is always where the biggest money is made.

I think this thread has the potential to be a lot of fun. How many of you reading this thread right now didn't know that commodities speculators make money when the price goes down?

This shows a wonderful naivete that thinks of itself as sophistication. Speculators make money when the price goes down? Wow, man, you're blowing my head.

I had to reply. And I enjoyed my reply so much that, in lieu of other inspiration, I'll reproduce it here.

Oil speculators make money when the price goes down only if they knew in advance that it would, or just guessed well.

Personally, I don't believe that the average oil speculator right now knew anything in advance. It seems to have been a paradigm 'random walk' of late, both up and down. So the successful ones have been guessing right.

No ... I wouldn't want to be a speculator right now for the same reason that I don't spend a lot of time in casinos.

People who DO spend time in casinos are performing a socially useful function (somebody else will probably make better use of their money than they know how to do). Likewise, people who speculate on commodity prices are performing a socially useful function. They create a market in which other parties, commercial entities, can hedge against risks.

But I wouldn't want to be the one performing that function, no. When oil was above $140, the general guess was that it would keep going up, maybe to $200, before heading down in a big way. What [do you] believe has happened to any speculator who acted on that bit of wisdom?