Obama's "Read my lips" moment is here!

[I AM NOT THAT GUY 5,715]

In order to pay for health care reform, President Barack Obama is proposing to take the axe--or at least the scalpel--to a longtime sacred cow: the mortgage interest deduction. The plan, which was included as part of the president's budget proposal for 2010--unveiled Thursday---would reduce the value of the mortgage interest and other deductions for the nation's highest earners. Taken together, the increases are expected to bring in $318 billion over 10 years.

Here's how The Wall Street Journal described the proposal:

Households paying income taxes at the 33% and 35% rates can currently claim deductions at those rates. Under the Obama proposal, they could deduct only 28% of the value of those payments…

For the 2009 tax year, the 33% tax bracket starts with couples with taxable earnings of $208,850, when adjusted for personal exemptions and various deductible expenses. A taxpayer in the top bracket paying $1,000 of mortgage interest, for example, would see a tax break worth $350 reduced to $280.

The proposal sets off what is sure to be a heated battle with housing-related industries. The National Association of Home Builders, for example, has already <A href="http://www.nahb.org/news_details.aspx?newsID=8697" target=_new>released a statement attacking the plan:

“With the housing market still reeling from its worst downturn since the Great Depression, this is not the time to talk about raising taxes on home buyers and home owners," Joe Robson, chairman of the National Association of Home Builders, said in a press release. "This proposal will increase the cost of housing for many middle-class families, particularly in high-cost areas such as California and the Northeast, which will only further undercut the housing market, exert more downward pressure on home values and work against the President’s efforts to stabilize housing and turn this economy around."

http://www.usnews.com/blogs/the-home-front...ping-block.html

[w¡n9Nµ7 §£@¥€r 123]

Big mistake. The 33-percenters in 2008 are people with household income of $164,550 or above (assuming single filing - $200,300 if married/joint). He promised not to raise taxes for anyone making less than 250k. Fact, $200,300 will hit a lot of middle-class married households in the big urban areas, people who voted for O in droves last November. He cleaned up around here in areas like mine where that's not a "rich" salary at all. Forget about it happening again in 2012 if this goes through.

Edited February 28, 2009 by A.J.

[alienlovechild 75]

Killing (or Maiming) a Sacred Cow: Home Mortgage Deductions

By Edward L. Glaeser

Edward L. Glaeser is an economics professor at Harvard.

The Great Depression provided an opportunity to rethink old policies in a major way. In the current morass, everything should, once again, be open for debate. One sacred cow that has long been in need of a good stockyard is the home mortgage interest deduction. So, in the spirit of libertarian progressivism, I suggest gradually reducing the upper limit on the deduction to loans of up to $300,000, and then refunding the tax revenues in a more productive manner.

The tax code allows homeowners to deduct the interest on loans used to buy, build or improve a home, for mortgage principals up to $1,000,000. (For mortgages used for other things – say, to finance the purchase of a car, or pay for college tuition – homeowners can deduct the interest they pay on loans of up to $100,000.)

A wide range of economists have long found fault with the deduction. Here are a few of the reasons:

Problem #1: Subsidizing interest payments encourages people to leverage themselves to the hilt to bet on housing markets. The size of the tax benefit is proportional to your debt. The deduction essentially encourages us to make leveraged bets on the swings of the housing market. That leverage means that housing price swings can easily wipe people out. We are currently experiencing the consequences of subsidizing gambles on housing.

Problem #2: The deduction pushes up prices in places where the supply of new homes is constrained, as it is in many coastal markets. Economics 101 teaches us that if we subsidize demand where supply is inelastic then the only effect is to make prices go up. Housing supply is pretty constrained in places like New York City because of land-use restrictions and lack of land. In these places, the deduction doesn’t make housing more affordable. It just transfers money from buyers to sellers, and that makes little sense.

Problem #3: The deduction is wildly regressive. The tax savings for households earning more than $250,000 is 10 times the tax savings for households earning between $40,000 and $75,000 a year, according to recent research by James Poterba and Todd Sinai.

If there ever was a case for small-government egalitarianism, then this is it. Eliminating the home mortgage deduction and replacing it with an across-the-board tax cut would equalize after-tax incomes without a single new government program.

Problem #4: The deduction encourages people to buy larger, single-family detached homes, and that increases carbon emissions and pushes people out of cities. The deduction encourages people to buy more expensive homes, which are generally bigger homes.

Bigger homes use more energy. The deduction is therefore implicitly urging Americans to run higher electricity bills and spend more on home heating. If global warming is a serious problem, then the government should be encouraging us to live in smaller, not bigger, dwellings.

Problem #5: The home mortgage interest deduction is poorly designed to encourage homeownership, which is, after all, the alleged desideratum. Much of the interest deduction’s benefits go to richer Americans who are likely to own homes in any case.

Poorer people who are on the margin of buying and renting often don’t even itemize. My own research in this area found that when the value of the interest deduction rose, during periods of high inflation, there was no observable increase in the homeownership rate.

If the goal of the deduction is just to increase homeownership, then it would make far more sense just to give a flat tax credit to people who buy homes. If the credit was independent of home value, then this would eliminate the incentive to buy bigger homes. If the credit was independent of borrowing, then this would decrease the incentive to over-borrow.

Now, I do understand that drastically reducing the cap on the mortgage interest rate now, in the midst of a housing crash, would be kicking the markets when they are down. Yet this crisis provides us with an opportunity to act that will be lost if we wait until housing prices rise again.

So here is my utterly quixotic proposal. Enact legislation now that will gradually decrease the cap on the mortgage principal for which homeowners can deduct interest payments by $100,000 a year over the next seven years until it hits $300,000.

The effect during the next two years should be sufficiently small that it will be unnoticeable in the current environment. Ending the madness of encouraging Americans to bet everything on housing, we can hopefully reduce the odds of a tragic repeat of the current boom-bust cycle.

http://economix.blogs.nytimes.com/2009/02/...?pagemode=print

[w¡n9Nµ7 §£@¥€r 123]

Problem #2: The deduction pushes up prices in places where the supply of new homes is constrained, as it is in many coastal markets. Economics 101 teaches us that if we subsidize demand where supply is inelastic then the only effect is to make prices go up. Housing supply is pretty constrained in places like New York City because of land-use restrictions and lack of land. In these places, the deduction doesn’t make housing more affordable. It just transfers money from buyers to sellers, and that makes little sense.

As an owner in a land-constrained coastal market, I respectfully say this to the author - GFY.

[dalegg 143]

Problem #2: The deduction pushes up prices in places where the supply of new homes is constrained, as it is in many coastal markets. Economics 101 teaches us that if we subsidize demand where supply is inelastic then the only effect is to make prices go up. Housing supply is pretty constrained in places like New York City because of land-use restrictions and lack of land. In these places, the deduction doesn’t make housing more affordable. It just transfers money from buyers to sellers, and that makes little sense.

As an owner in a land-constrained coastal market, I respectfully say this to the author - GFY.

Not at all saying I agree with the proposal, but he does have a point. There would be less foreclosures on my coast if people didn't take loans they knew would give them big tax deductions.

[w¡n9Nµ7 §£@¥€r 123]

Not at all saying I agree with the proposal, but he does have a point. There would be less foreclosures on my coast if people didn't take loans they knew would give them big tax deductions.

Most of the foreclosures in my area are in the lower end of the market (300k or below). The high end (millions) is still doing relatively well. I doubt the mortgage interest deduction is a big contributor to the foreclosure problem around here. The problem is relatively straightforward - a lack of confidence among potential buyers.

[dalegg 143]

Not at all saying I agree with the proposal, but he does have a point. There would be less foreclosures on my coast if people didn't take loans they knew would give them big tax deductions.

Most of the foreclosures in my area are in the lower end of the market (300k or below). The high end (millions) is still doing relatively well. I doubt the mortgage interest deduction is a big contributor to the foreclosure problem around here. The problem is relatively straightforward - a lack of confidence among potential buyers.

We have thousands of people out here with mortgages of $500,000 and above that had absolutlely no business qualifying for them. The subprime fiasco was the real culprit, but I'm sure a few of these people might have backed off if they weren't expecting tax deductions to subsidies their mortgage payments as much.

[I AM NOT THAT GUY 5,715]

Big mistake. The 33-percenters in 2008 are people with household income of $164,550 or above (assuming single filing - $200,300 if married/joint). He promised not to raise taxes for anyone making less than 250k. Fact, $200,300 will hit a lot of middle-class married households in the big urban areas, people who voted for O in droves last November. He cleaned up around here in areas like mine where that's not a "rich" salary at all. Forget about it happening again in 2012 if this goes through.

I am sure the excuse will be, "The $250,000 threshold was meant for the Total Income for a typical family of four, before deductions, and exemptions."

[Hilarious Clinton 452]

Did Obama ever take a college level economics class? Oh yeah.... his transcripts are sealed.

Most transparent administration.... my a$$.

[Waldo 0]

I find it Ironic for all the Obama bashers there are here that squeal bloody murder whenever he does something to reverse the problems Bush has given us. Common, someone blame it on Clinton... lets hear it. Even though he's been out of office over a decade. What is it that the rednecks were saying back when Bush was first inaugurated? "Love it or leave it baby YEEEEEEHAAAAAW!" well it got a little quieter when gas rose above $4 a gallon banks started going out of business and the unemployment rates shot through the ROOF! Lets see that reliable scale on how our deficit went down while the republicans were in office. SURE it did!

[Ban Hammer 13,337]

Problem #2: The deduction pushes up prices in places where the supply of new homes is constrained, as it is in many coastal markets. Economics 101 teaches us that if we subsidize demand where supply is inelastic then the only effect is to make prices go up. Housing supply is pretty constrained in places like New York City because of land-use restrictions and lack of land. In these places, the deduction doesn’t make housing more affordable. It just transfers money from buyers to sellers, and that makes little sense.

As an owner in a land-constrained coastal market, I respectfully say this to the author - GFY.

not to mention that it is one of that last few incentives left to own a house.