Paying for the Deficit with Taxes…

October 26, 2010

I know we keep talking about this stuff but it’s important.

I read this article this afternoon: Key Tax Breaks at Risk as Panel Looks at Cuts.

The biggie on the table is the mortgage interest deduction. That’s not all:

…in addition to the mortgage-interest deductions, are child tax credits and the ability of employees to pay their portion of their health-insurance tab with pretax dollars. Commission officials are expected to look at preserving these breaks but at a lower level, according to people familiar with the matter.

The officials are also looking at potential cuts to defense spending and a freeze on domestic discretionary spending.

Ending the mortgage interest deduction would personally hurt us. Maybe they can grandfather in those of us who already have mortgages since they gave $8,000 credits to first time homebuyers earlier this year.

This portion of the article was telling:

…officials have found there aren’t any easy ways to balance the budget, and they are expected to steer clear of more polarizing issues like Medicare, Medicaid, Social Security and a broad rewrite of the tax code in their short-term recommendations. The panel could still make long-term recommendations to change these issues, but they would be less concrete.

Once again, we duck the really large issues and stick with patchwork solutions. We are not going to rein in the deficit through taxes alone.

37 responses to Paying for the Deficit with Taxes…

  1. What is very telling is the line, “the White House has said these and other breaks cost the government about $1 trillion a year.”

    From my point of view, they SAVE TAXPAYERS about $1 trillion a year.

    Actually, though, I do not really believe that the mortgage interest deduction does anything except raise the price of houses. Ask any real estate agent what would happen if the mortgage interest deduction were eliminated, and he will tell you that the prices would fall accordingly, simply because there is less money available.

  2. Yeah, the mortgage tax deduction needs to go. Where’s my tax deduction as a renter? It sucks that it would personally hurt you, JLP, but it would personally help me as I begin to look for houses and want the cheapest price possible. 🙂

  3. JT wrote:

    “Where’s my tax deduction as a renter?”

    Didn’t you take that into consideration before you rented? The deduction for mortgage interest has been in existence for decades. My wife and I rented for a number of years. We didn’t get the deduction during those years either.

    I’m not saying I agree with the deduction. What I am saying is that this is just another way that the government will make the tax code even more unfair since doing away with the deduction will only hurt those who the government deems “rich.” It’s class warfare at its finest.

  4. What was that promise we kept hearing about no tax increases on families with incomes under $250K? Hmmm?

    Jack, I wouldn’t look to real estate agents for information about fiscal policy. That’s like asking the guy at McDonald’s drive thru window about cattle futures.

    JT, as a future homeowner you WANT the deduction!

  5. I think I would rather let the Bush tax cuts expire than lose my mortgage deduction and pre-tax health care payments. What a joke.

  6. It is shame they aren’t looking at broad restructuring of our tax policies.

    While I benefit from the mortgage interest deduction, I think our government needs to get away from using the tax code as social engineering and paying back lobbyist.

    It is also shameful that the government considers the loss of tax revenue a cost. It isn’t a cost, it wasn’t your money to begin with!

    Until our government shows some real balls by cutting entitlements deeply and I can’t see how they can ask for tax increases with a straight face.

  7. JT — your tax deduction as a renter is that all repairs, upgrades, etc. are tax deductible, thus lowering your rent.

    As a future homeowner, JT, the existence of the mortgage interest is entirely irrelevant to you. If it is eliminated, the price will be commensurately lower.

    THC, the one thing that real estate agents know is how to price a house to sell it.

  8. Do you guys that the govt. has any idea of how to fix anything? The one thing they do know how to do & are experts at it is raking in as much $ as they can personally, legally or illegally. Officials are almost never accountable for the way they vote (or not vote) and continually get away with braking the law and lying. The more your read the more you realize that officals mostly concern themselves with their own best interests. Taxes will surely go up in all kinds of ways because it easier to hide tax increases (naming them something else) than to do the right thing & streamline govt and costs. There are many positive steps that offcials can put in place to increase revenue, reduce costs and promote jobs in the USA. The main problem is the $ that is offered to them by corporations & other groups.

    Sorry for the rant- many of the answers are obvious but when the foxes are running the hen house, not much is going to change for the better.

  9. This commission will not amount to a hill of beans.

    The mortgage deduction will be the last thing to go. Actually, there is probably nothing that is going to go. The tax rates will probably stay the same after the election, and we will continue increasing the debt and everyone will be happy.

  10. Russ,

    I agree with everything you said.

    As long as our presidents and leaders play the populist message, we will not see real change. We will only see more piling on of taxes on those who actually produce.

    I believe in the ownership society and I believe that EVERYONE should “own” their share of the tax burden in this country.

  11. The mortgage interest deduction is really just a sham for realestate agents to get you to buy more house than you can afford. You see claims all the time like:

    “The interest rate is 5%, but after the mortgage interest deduction it is only 3%”.

    Of course, these unscrupulous agents don’t tell you that you first need $11,400 in OTHER deductions to be able to itemize the mortgage interest fully (married couples).

    Most people don’t have enough deductions to even be able to itemize at all. Good riddance I say.

    And for those arguing that the government needs to reduce ‘costs’, like entitlements and what not. This deduction IS AN ENTITLEMENT!

  12. It’s okay (if you have good credit). You could create a business that you own to buy the house from you; then pay rent to your new Business, INC. Then deduct ALL expenses associated with the house.

    There are ways to get around this, but this might be one way.

    It’s a moot point anyways, bc they will NOT eliminate this interest. The child tax credit or bush tax cuts will go first. Then raise medicare & soc sec taxes. This would be last (in my opinion).

    Here’s a novel idea, why not cut spending? How about cut the federal budget (all areas) by 50%? Then the revenues would better match expenses. There would be a lot more people on the unemployment line for a little while, but it would shift a lot of capital to the private markets where it belongs.

  13. #12 Beeg said:) “…Here’s a novel idea, why not cut spending? How about cut the federal budget (all areas) by 50%? Then the revenues would better match expenses….”

    That’s not really that novel an idea. This was the system we had not too long ago, and it goes by the name “PAYGO” (look it up in wikipedia). We had PAYGO from 1990 (clinton) till 2002 (bush). PAYGO was busted in 2002 when the “Bush tax-cuts” were signed into law — without a direct cut in spending to match. Since then, we’ve ran yearly deficits.

    PAYGO means that the budget must be balanced, and have no deficits. This can be done in a few ways:

    1) reduce spending (like you said) to match tax revenues
    2) increase taxes to match spending levels
    3) or a combination of both

    I am all for PAYGO being brought back, and I would even support a constitutional amendment requiring it.

  14. I want one tax rate for all earnings. Equal taxes for everyone. Then everyone can vote equally. Otherwise, if you don’t pay taxes you don’t get to vote. Or some kind of combination.

    What was the deficits b/f 1990?

    Eliminate soc sec, medicare and a host of other government run inefficient programs.

  15. I’d eliminate both the mortgage credit and pre-tax status of health benefits, though only the second would harm me personally.

    The mortgage benefit is just weird; why do we give people a tax benefit to buy (expensive) houses? I say phase this out over a 10-year window. It phases out over time for almost everyone anyway.

    And giving people a tax break for their health premiums just encourages them to buy too much insurance. For the sake of the system, people should be choosing higher deductibles and spending more of their own money. Only when you spend your own money do you care if your health dollars were spent wisely. When it’s the insurance company’s money you want all the care you can get whether it helps or not.

  16. Don wrote:

    “giving people a tax break for their health premiums just encourages them to buy too much insurance.”

    I don’t agree with that. My wife and I buy insurance based on affordability. The pre-tax benefit didn’t really come into play and certainly did not encourage us to “up our benefits.”

    I say if you want to get rid of the tax advantages of health care then we should quit taxing social security taxes too. It’s ridiculous that the government can take our money and tax us on it too. How can that be Constitutional?

  17. PAYGO was as big a joke as The Gramm-Rudman-Hollings Balanced Budget and Emergency Deficit Control Act of 1985. It just required another vote to suspend the rule whenever Congress felt like it.

    A Constitutional Amendment!? Get real. If Congress abided by the Constitution, we would not be spending on all these unconstitutional programs in the first place.

    We have Senators that do not know their job in an impeachment trial, a VP who doesn’t even know he is still in the legislative branch, Congressmen who cannot understand the simple “shall not be infringed,” and congressmen who say they don’t give a damn about the Constitution, and you think another Amendment is going to do any good?

  18. “And giving people a tax break for their health premiums just encourages them to buy too much insurance.”

    It may, but a larger driver is that most people do not pay for their own insurance. If your company paid 75% of your car insurance, wouldn’t you want it to cover oil changes, tire rotations, and inspections? But, being rational, you realize that the overhead for the insurance costs more when you pile on maintenance, so you pay for it yourself.

  19. The mortgage deduction is to encourage home ownership because owners take better care of their neighborhood than renters. You have less litter, more concern about schools, etc. Owners have a stake in their community so they are more likely to be good neighbors.

    Homeownership is also how most people built wealth.

    There is a benefit to homeowners and the government was trying to encourage it with tax breaks.

    There would never be one tax rate because the Libs are going to complain that it hurts the lower income earners more than higher incomes.

    I say who cares. Life ain’t fair. Go out and figure out how to earn more money.

  20. Russ) you make good points to keep the mortgage deduction in place, my question to you is: who are you going to raise taxes on to PAY for it?

    This is a common problem that I see. People always defending _their_ entitlements, but do not, at the same time, want to deal with the harder issue of how do you pay for it?

    Everyone loved Bush’s tax cuts, but no-one, no Republican at least, wants to admit that he didn’t cut spending to pay for it. Yes, reducing taxes is a cost for the government — just like if you decided to quit your job and work part time would be a ‘cost’ for you.

    This is a very simple point that people need to understand: Cutting taxes, without reducing spending, is the EXACT SAME as increasing spending, without raising taxes. The resulting deficits will be identical.

    And Jack, you may like to trash PAYGO — but you need to admit it worked perfectly for 12 years until the unpaid for “Bush Tax Cuts” busted it.

    BTW: I was incorrect earlier stating that Clinton started PAYGO, it was actually Bush Sr. in 1990 that started the program, and Clinton extended it during his two terms (both in 1993 and 1997).

  21. No, I will only admit that PAYGO worked as intended, which was to make everyone THINK they were doing something, when in reality they simply voted repeatedly to suspend it. The deficit (relative to GDP) did not start to go down until REPUBLICANS took over the House.

    YOU must admit that, after the 9/11 bump, the deficit:GDP ratio came DOWN until Democrats took over. They then nearly tripled that ratio with the first budget they wrote, and DID triple it the second. In all, they went from 1.14% of GDP to 9.91%. THAT is what you are supporting when you vote for a Democrat next Tuesday.

  22. Politics aside, now would not be the time to eliminate the mortgage interest deduction. If you want to see what a cratered housing market would look like, look no further. Any elimination of the ded would be an economic disaster for our walking wounded economy.

    Why do you think economists and pols are so concerned about the housing market? Housing industry provides jobs to a wide range of folks, from construction and home improvement to appraisers, mortgage folks, and so on. Home owners tend to be long-term stakeholders in their communities precisely because its harder to just pick up and move vs renting. Ownership provides communities with stability. And homeowners make a nice target for all kinds of local taxes and fees (r.e. tax, water/sewer, etc.). Renters don’t know the half of how much leeching local govts do off homeowners. We’re sitting ducks every time local pols need to plug budget deficits.

    Now I know somebody out there will point out the recent govt-sponsored failed experiment with increasing levels of home ownership via encouragement of aggressive mortgage lending practices, and yes, that has certainly destabilized some areas, but overall, home ownership is net beneficial to our society.

    I also agree with whomever said it is the primary saving/wealth building tool of the middle class. I know quite a few folks who could not save a dime if their lives depended on it. Their home is their largest (and sometimes only) source of net worth and at least they have that, if nothing else.

  23. And I failed to clearly mention that considering the role housing plays in personal net worth, housing market valuations are a huge driver of consumer confidence and hence economic activity – yet another reason any tax code actions on mortgage ded’s would be extremely destructive for everyone, not just homeowners.

    Whether you think it philosophically a good idea or not, we are where we are, valuations are based on it, and taking it away would have a significant economic impact.

  24. Miguel — if you support the mortgage interest deduction, then you have no right to complain about the huge federal deficits and the national debt. Simple as that.

    From my POV, I think the federal debt is a more important priority and ALL deductions should be cut immediately (ie; raise taxes) to get this country onto a balanced budget. Then, and only then, should these deductions be re-instated under a PAYGO policy so that taxes are raised elsewhere to give homeowners their cherished mortgage interest deduction back.

  25. BG, you and I don’t disagree. Yes, I benefit from the homeowner deduction. I like it, but at the same time if it were to go away, it wouldn’t bother me as long as ALL OTHER DEDUCTIONS ACROSS THE BOARD GO WITH IT.

    I don’t want our tax code being used for social engineering of any kind. The Feds need to just pick a tax rate and call it a day. All this if then, but this, on occassion that, maybe if you do it this way, but only in this location, if you happen to be a special group bulls*t tax code needs to go.

    There is no logical reason that people can’t file their taxes on a standard size postcard.

    Corporate taxes also need to be eliminated entirely. Corporations don’t pay taxes, consumers pay taxes.

  26. There is no reason that people should even HAVE to file taxes. Just have a sales tax and no income tax. Simple, and the federal government would have no reason to care how many children you have, how many wives you have, or even whether your “wife” is a dude.

    You would think the civil libertarians would go for that, but they prefer class warfare — it is more likely to keep them in power.

  27. I would fully support a sales tax and no income tax. Of course, the only downside is that I am sure a black market would erupt, but I think it would be a lot easier to police than this fustercluck we have now which is our tax system.

  28. Seriously, how big is the black market in cigarettes? And they can be easily transported from a low-tax state to a high-tax state. But we are talking about a uniform sales tax, which would not have that temptation.

  29. In regards to a national sales tax — personally, my spending would drop considerably, and my savings would go up considerably.

    Some would argue that this is a good thing (increase savings rate) — but it would kill the economy for new goods. People would switch to purchasing ‘used’ goods to avoid the tax (think Craigslist).

    I don’t think replacing an income tax with a sales-tax would ever work. However, a mixture of the two would be OK. Would anyone really notice a 1% federal sales-tax added to all new goods?

  30. Both Canada and the EU have sales taxes (called VAT). There is no evidence for either increased black-market activity or an great favoritism for used good over new.

  31. JLP wrote: What I am saying is that this is just another way that the government will make the tax code even more unfair since doing away with the deduction will only hurt those who the government deems “rich.” It’s class warfare at its finest.

    So the bigger the mortgage, the bigger the deduction is being fair? I should never be surprised to see what people think is “fair”.

  32. Geoff,

    I think it’s fair considering that those who have bigger mortgages typically have bigger incomes and therefore pay significantly higher taxes do the progressive nature of the tax code.

  33. I see your point, but ultimately I disagree with the idea that a progressive tax code is unequal. There are so many other factors involved, which is why a flat tax would be regressive, rather than equal.

  34. I don’t understand why we can’t have a tax code similar to tithing. If you are a tither, you dedicate 10% of your income to your church or charity, regardless of your income.

  35. We don’t want both a VAT and income tax b/c a VAT would start out as “only 1%”, but then it would go up to 2 and 3 and eventually 10%.

    Politicians have enough money of the American people. They really have too much. If you give them more money they won’t save it they will spend it. Look at Social Security. It has been bringing in more revenue than expenses for years, but instead of set that money aside they fed govt has given the Soc Sec trust an “IOU”. Now there is multiple billions of $ probably trillions of $ that has been spent b/c over the last 20 or more years Congress and the Pres have been thinking they had a positive surplus from Soc Sec.

    Now, boomers are hitting the soc sec fund and it is in defiict. The economy sucks and is going down the toilet. But we still have over $1 trillion deficits. Some how our IDIOT law makers still pass health care that adds another $1 trillion in debt.

    This is ridiculous. We’ve gone tilt.

    Game over. We don’t need more taxes. We need less taxes and even more so less spending. Cut the federal spending by 25 to 50% over the next 10 years. Remove entitlement programs (soc sec & medicare). Kick granny to the curb from a tax payer standpoint. Go back to how cultures used to deal with old people, they are taken care of by their kids not govt employees.

    Oh, and get the fed govt out of education.

    One more oh, elminiate the Federal Reserve.

    Then we might have liberty again.

  36. JLP, but 10% tithing by rich and 10% by poor isn’t even considered equal in the Bible, so why would it be equal in our current society? Remember the story of the old lady who gave all that she had, even though it was little?

  37. There was tithing and offerings (or giving) in the Bible. The story you are talking about was one of giving, not tithing. The rich were giving out of their abundance. The woman was blessed because she gave all that she had.

    There’s no mention in the Bible of people tithing based on level of income. In fact, the very meaning of the word “tithe” is “one tenth.” So, a person could not be “tithing” if they were giving less less than 10% back to God.

    Back to taxes…

    I think everyone should pay taxes and I think everyone should pay the same percentage. Those who earn less will pay less. Those who earn more, will pay more. CPAs would hate it!…lol.