Thursday, November 2, 2017

Who the Change in The Mortgage Interest Rate Deduction Really Hurts

At the post, BASTARDS 2: Republicans Propose Lower Cap On Mortgage Interest Rate Deduction, a commenter who goes by the username Paid in Shill writes:
So... are we here at econpolicyj now thinking that reducing a subsidy will reduce the purchase of that product? (In this case, reduce the subsidy to home-buying reduces the stock value of a home builder because the market expects ... fewer home buyers)

So then, if SALT goes, a deduction for funding local government, won't local government become more expensive? But the law of demand doesn't apply here, because commenters (and OP) live in high income tax states?

JK, I love you RW. But the SALT issue is pretty funny.
This is just poor sloppy thinking and I have
discussed most of this before. I fear with Paid in Shill that we are dealing with a reading comprehension problem and the inability to think out long steps of economic reasoning.

First, with regard to the SALT question. No one said that increasing the price does not reduce purchases. However, if you increase the cost to a non-buyer that will have little impact on the buyer. And that is certainly something like what can occur under the SALT scenarios.

As I pointed out at a related post, Should a Libertarian Support the Elimination of the Local and State Tax Deductions on Federal Income Taxes?, where Paid in Shill posted many times:
In the high tax states, suppose we have a situation where a majority of the people gain from high state and local taxes and it is only the wealth-producing entrepreneurs and capital owners who are taxed at the state and local level. In this case, the majority are certainly incentivized to keep the high taxes even if the deductions are eliminated at the Federal level.
Only by ignoring that there are taxpayers and tax takers in a government jurisdiction can one make the fallacious, government as the decision maker for all, argument that PS makes, with his asinine false demand analysis.

That is, if the minority high taxpayers (the productive) experience increased taxes, this will have no impact on the decision making of the majority tax takers (and the government)--and thus the increased Federal tax and state and local taxes can stick.

There is also faulty analysis by PS with regard to the home mortgage interest deduction situation. A previous buyer of a house bought under one set of tax rules experiences a loss when taxes are increased for new buyers. This goes well beyond home builders, whom PS lays the entire loss upon. It is a loss of wealth for all homeowners and a hefty tax on all desiring to sell. The point of taxation is not the key, it is where it ultimately falls that determines where the damage is done. (see "Binary Intervention: Taxation" in Murray Rothbard; Power and Market). In this case. as I say, it damages the value of homes for all owners because buyers will be willing to pay less for homes and given continued inflation all houses will eventually be impacted. Since there are some 125 million homeowners in the US and there is no provision to increase the mortgage size as price inflation climbs, this will eventually be wealth robbing of all homeowners.

You really have to be a dimwit to call such a tax a "subsidy" when it grabs wealth from 125 million Americans. It is a horrific across-the-population tax increase.

Finally, I have consistently called for tax cuts everywhere and always. PS displays more problems in deep thinking and comprehension to charge that I am against a tax increase because I am in a high tax state.

I am against taxes, all of them, because I am a libertarian. 



  1. "That is, if the minority high taxpayers (the productive) experience increased taxes, this will have no impact on the decision making of the majority tax takers (and the government)--and thus the increased Federal tax and state and local taxes can stick."

    Wrong. I'm frankly amazed that an increase in price has no effect in this analysis. If some taxpayers LEAVE income tax states now that their deduction is gone (and thus living there costs more) then the revenue for the state will fall and government will be reduced. Easy peasy. Granted that the taxpayers won't like it, but who does when their prices go up and so they forgo a purchase they'd have made otherwise (in this case, "purchasing" living in e.g. California). Law of Demand. Smaller government for Cali and the taxpayers who leave (the taxpayers who leave move to lower tax/smaller government states; Cali can't afford the level of gov. it had, so it must reduce). Then, once you've left and you have no deduction on your fed taxes, those will marginally piss you off more. You will take marginal (likely mostly ineffective) steps to reduce the fed burden.

    And you misunderstood my mortgage deduction argument. It was merely to show that if you remove an artificial downward price adjustment (in this case, artificially making home-ownership cheaper, and encouraging debt -- why own outright and lose your deduction?) then people purchase less. It works for houses, it works for widgets, and it works for government services. It might not always *look* as clean as the market for widgets, but it's there--you just have to look for it and not be blinded by its effect on you personally.

    RW, is there a tax burden that would make you leave San Fran (or Cali, generally)? If so, that is, if you would stop purchasing life in Cali under their government and exchange that for life somewhere with less expensive government, then you've proven my point. If you say there is no tax burden that would cause you to leave, I say you're fibbing.

    "This goes well beyond home builders, whom PS lays the entire loss upon." This is just beyond silly. I never said the entire loss is on home builders. I merely pointed out that, since they lost value, it was an indication that the law of demand holds; that a removal of a subsidy to homebuyers/owners will reduce demand for homebuying/owning. Of course the losses are spread to ALL involved in that market. I mean, I may be sloppy at times and I'm no Murray, but c'mon.

    1. So now you admit the elimination of the tax deduction will increase taxes for the productive so much that they leave a state. Which is the exact opposite of your original claim.

      You get the Milton Friedman medal for technocratic bull shit to advance an interventionist move for arguing that after a maze of potential twists it "only hurts the people that have to move."

      As for what you understood about the impact of housing. I can only know what you stated and you didn't say anything about housing in general . Now that you make clear you understand my analysis that it applies to all housing, you should get means it is a major tax not a subsidy.

      But, hey, you did get one thing right, you are no Murray.

    2. How are we missing each other so hard? Yes, it will increase the tax burden locally on the taxpayer. That's the entire point. It will make Cali taxes have more of an impact; that is to say, it will make each tax dollar in Cali seem like a real dollar, and not one that will offset another tax dollar somewhere else. Therefore, Cali taxpayers can either lobby/vote for lower taxes or leave (also for lower taxes). Sooooooo... there is now pressure to lower taxes in Cali! Just like I said. Just like you said could never happen.

      Also, they will find their fed tax bill increased because of the loss of deduction. Since overall fed spending doesn't decrease, that means that the share of the same tax pie will be larger for those losing the deduction. Therefore, on the margin, those same taxpayers will lobby/vote to lower fed taxes (or spending, which amounts to the same thing).

      SO, if I live in a no-income tax state, I have now just gotten, e.g., Cali residents who will either A) oppose their local taxes and the federal taxes/spending more vociferously; or B) move to no-income tax states, thus improving the finances of no-income tax states at the expense of income tax states.

      I fully stand by my position. SALT deductions subsidize income-tax state governments locally, and fed taxes/spending generally, all on the backs of no-income tax states. Take away the deduction and it's good for those living in no-income tax states.

      You said: "I can only know what you stated and you didn't say anything about housing in general."

      I had said: "(In this case, reduce the subsidy to home-buying reduces the stock value of a home builder because the market expects ... fewer home buyers)" in direct response to: "In the wake of this news, luxury homebuilder Toll Brothers Inc. fell as much as 7.3 percent, and retailer Home Depot Inc. also saw heavy losses.

      The SPDR S&P Homebuilders exchange-traded fund, ticker XHB, and an S&P index that tracks builders also plunged in early trading."

      This is why I didn't mention everyone in the entire housing market--because I was directly responding to your words, where you didn't note the losses sustained by everyone in the entire housing market.

      Be fair. I mean, "you didn't say anything about housing in general" either!

    3. Also, I in no way think you're a shill. That's just the name that popped into my head when I made the account. I hope that hasn't offended you; it wasn't meant to be a troll job.

    4. We are missing each other because I am against higher taxes and you are not. You are acting like a government technocrat trying to design bizarre mazes that justify your imposition of higher taxes. In this case ignoring the fact that pushing people to move is a particularly horrific tax.

      And if you don't think that I referenced housing in general from the start, its more evidence of your reading comprehension problem.

    5. "You didn't say that Jeff will lose money on his house. By not mentioning Jeff your argument is somehow invalid."

      My point is that the law of demand holds in housing. I don't need to reference everyone in the market. It's redundant. We both agree: remove a subsidy to a market and everyone in that market will feel pain.

      I refer to deductions as subsidies because spending doesn't change, which means the tax burden doesn't change, which means those who get the deduction get the same amount of government services but with a lower bill. If the deductions meant that the government didn't get the resources to do the project--that would be a different story.

      I think you're confused by thinking that a deduction is a reduction in taxes. It's not unless it means a commensurate reduction in spending. Since it's not, it isn't "a reduction in taxes," it's a "transfer of the burden of government spending."

      So all it is is a distortion in the "market" for government spending. I don't like distortions in the market, and there's no moral reason for me to favor people who live in income tax states over those who don't.

      And it is positively odd that someone who favors removing deductions from the tax code (i.e. less bizarre design in the state's program) am being accused of technocratism. It is you in this case defending extra tweaks to get it "just right."

      Finally, I really think a big conceptual problem here is that you seem to have as in implicit assumption that a tax deduction for anyone reduced government taxation. We would agree, I believe, that that government spending = taxation; but this means that if the government gives a deduction to some but does not reduce spending, the deduction functions merely as a TRANSFER. This is how I'm analyzing it. You are implicitly assuming the deduction means fewer resources taken from the private sector and given to the State; this is not the case.

    6. " If some taxpayers LEAVE income tax states now that their deduction is gone "

      This move to a low tax state argument assumes everyone can just pick up and move. For instance, my skills and abilities leave me predominately with a choice of high tax states because that is where the capital is and has been. A move to low tax state generally means starting over in a new career with a huge loss of income. Sure things are getting more mobile but not everyone is in software.

      This fixed capital is why the wealth producing high tax states have gotten away with it for so long. The tax increase for most people from not deducting state income taxes is going to be a few hundred dollars. Is saving that worth reducing one's income by tens of thousands? Not yet.

      Perhaps at some point taxes do get high enough for reducing income drastically, but that driver would likely be something on the federal level like Bernie Sanders' plan for single payer. Now maybe corporate taxes get high enough to force moves of companies but that's not what we are discussing here.

      "I fully stand by my position. SALT deductions subsidize income-tax state governments "

      But you do not support it with any facts or analysis. You need to show that these low tax states simply aren't good at getting taxes from people in other states through the federal government. Something contrary to every analysis I've seen to date.

    7. "This move to a low tax state argument assumes everyone can just pick up and move."

      In economics we think on the margin. You apparently assume that if someone can't "do the whole thing" that they will, and can, do nothing.

    8. I make no assumptions, you make the assumption of mobility. Here's the thing, the most able to move are largely gone already. A few hundred dollars in federal deductions does not keep them in state. Nobody says 'I would move but for this deduction of the high taxes'. But they do cite the high taxes for leaving.

      Furthermore you still have not supported your argument that the deduction of local taxes is a subsidy by showing the subsidy. Many of the high tax states are subsidizing the low tax states based on every method of measuring the wealth flows through the federal government I've seen.

  2. “Take away the deduction and it's good for those living in no-income tax states. ”

    False. I’d rather that money be in the hands of private citizens than hav the state squander it on wars and banker bailouts.

    If the police beat you up, would you want them to beat up your neighbor as well? You know, to be fair?

    1. You make the same error as RW. You think that if someone gets a deduction then the feds have to spend less. If we had sound money and that was the case, you and RW would have a point. But since he keeps saying it and others keep parroting it, it is obvious you're wedded to the fallacy to support your own bias in resisting the end of a shift away from you to others. Perfectly natural, but not good economics.

      So yes, if the feds are going to spend the same then the tax burden is the same; and if they are no longer shifting it from you to others, then that's good, too. If you're upset then do something to lower the overall tax burden (like vocally opposing gov spending).

      Your analogy fixed: "If the police have *a quota of beatings to hand out*, and if they arbitrarily give some people 'no beating' cards, and if they therefor have to double up on the beatings of some in order to make up the shortfall, then would you want them to revoke the 'no beating' cards of some, just so that they would also feel the pain of the policy and be incentivized to oppose it, all the while decreasing the beatings of those who were going to be beaten twice every year instead of once??"

      Yes. Yes I would.

    2. RW: "I am against taxes, all of them, because I am a libertarian."

      A deduction for some with no commensurate reduction in spending IS NOT A REDUCTION IN TAXES. It's just making the distribution of the burden more even, and removing a technocratic political "fix."

      RW, you are not advocating (or getting) a reduction in "taxes." You are advocating (and hoping for) a shift of the tax burden to someone else.

      Thing is, I know you're beyond smart enough to have this figured out, so I'm just gonna chalk this up to "you pay a shit-ton of SALT in San Fran but goddamit you like living there enough to pay it, but not enough to not complain about it."

      Yes, you're a libertarian, but you're also human. So I'll forgive you for this one, even though you want others to shoulder part of your federal burden and you wish Cali's gov wouldn't grow so much.