Reading the tea-leaves on the Home Mortgage Interest Deduction.
A few weeks ago Romney was saying that his huge tax cuts for the rich would be paid for by closing tax loopholes for top-earners.
He mused, without specifying, that perhaps the Home Mortgage Interest Deduction (HMID) would be eliminated for second houses or for property value in excess of $3 million...
Needless to say, there is not nearly enough revenue in such proposals to pay for the Romney tax cuts. (I think it is safe to guess that the very rich spend a lower percentage of their money on housing than any group.)
But that was what he was saying.
Fast forward to today. Stephanopolus asks Ryan to specify what deductions he will eliminate to come up with $5 trillion. Ryan refuses to answer directly, of course, but he tap-dances about how the burden of the deduction cutting will fall on the well-to-do.
Okay, I'm thinking, same old Romney line about how giving a millionaire a dollar and charging him a nickel is somehow revenue neutral.
But Ryan, flustered, went on to explain that the burden would fall to the well-to-do because they are likelier to use some of these deductions.
See the difference?
Not formal means testing, but rather means testing in effect because if you eliminate a deduction entirely it will have the effect of increasing taxes more for a rich person, because a rich person takes bigger deductions.
Translated into English: If we eliminate the HMID it is really a tax on rich people because they are liklier to own a house and tend to have bigger houses, so it will cost an individual rich person more than an individual middle-class person.
Translated into really simple English:
[font size=3]We will eliminate the HMID entirely[/font size]
...and funnel the increased revenue to people who make their money primarily from capital gains and dividend income.
So what would the effect of this be? Well, for starters it would reduce the value of every piece of residential real estate in America by 10%, 20%...I don't know the figure, but it would dramatically reduce the investment value, and market price, of every American home. (And giving the homeowner a corresponding income tax cut doesn't change that because everyone gets the income tax cut but the HMID is tied to the property.
Say you deduct $1,000 of mortgage interest every month. So you save $12,000 * your tax rate. Call that 20% when all is said and done, so you save $2400 in taxes. Now let's say that we eliminate the HMID and cut your income tax rate so that it totals $2,400 less per year. So you broke even... eliminating the HMID didn't cost you any cash money.
But the HMID was intrinsic to the value of your house. It was a $2,400/year bonus that anyone could receive in exchange for buying your house. So a person deciding whether to rent or to buy your house now has to subtract $72,000, amortized over 30 years, from the value of the house to her. ($72,000 is $2400/year over a 30 year mortgage. Because of inflation and such the subtraction in sale price today would be smaller than $72,000 in 2012 dollars, but it would be large. Anyway, you get the point I am making.)
The federal subsidization of property values is probably unfair. I don't love it. However, there is a reason that to be talking about eliminating the HMID today is INSANE...
The whole reason this downturn will last a decade is because it was caused by a bubble burst in residential real-estate, and residential real-estate is, in specific, the sector of the economy that always leads the way out of a normal recession. We lack the usual interest-rate sensitive labor intensive driver of recovery. Super low mortgage rates should be creating many jobs in home construction but we are coming off a housing over-build and home prices are still flat-to-declining and people do not want the risk of a house. (And these low mortgage rates are, at 3-4%, actually too high. Because of the zero boundary mortgage rates are not free to find their true price because no bank will lend for 30 years at 1%, collateralized by a property that might collapse in value down the road.)
So the effect of lowering all residential real-estate values further, at this point in time, would be something quite comparable to the Great Depression.
The two most popular things in America are 1) Medicare, and 2) the Home Mortgage Tax Deduction. And these people expect to waltz into office while scheming to destroy both of them!
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