Here's a passage from the book Fixing the Housing Market, by Franklin Allen at al.
In chapter 2, the authors are engaged in some historical stage setting. They write that a major result of the 1890s economic downturn in the U.S. was "the virtual elimination of the so-called national institutions [in the building-and-loan market.]. This type of institution developed in the 1880s by gathering deposits and making mortgage loans on a national scale through the use of branch offices and the mail. Although the downturn of the 1890s hit both nationally based and locally based institutions, local associations attributed their problems to the improper loan strategy and subsequent failures of the national institutions. They claimed that customers were unable to distinguish between the two types of firms during the panic of 1893. The increased competition engendered by the nationals also led to the establishment of the US.League of Local Building and Loan Associations. This group became very influential during the subsequent years and successfully lobbied the state legislature to curb the acrtivities of the national associations, a move that eventually drove the nationals out of business."
Showing posts with label mortgage interest. Show all posts
Showing posts with label mortgage interest. Show all posts
22 March 2012
07 March 2009
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?
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?
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