Comments on: How to reduce the mountain of debt http://blogs.reuters.com/felix-salmon/2009/07/14/how-to-reduce-the-mountain-of-debt/ A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 http://wordpress.org/?v=4.2.5 By: Don the libertarian Democrat http://blogs.reuters.com/felix-salmon/2009/07/14/how-to-reduce-the-mountain-of-debt/comment-page-1/#comment-4152 Tue, 14 Jul 2009 18:56:13 +0000 http://blogs.reuters.com/felix-salmon/2009/07/14/how-to-reduce-the-mountain-of-debt/#comment-4152 The reason that we have tax incentives and govt guaranteed lending is because, in the US, we have an aversion to giving people money. With a tax credit, you can tell that they paid taxes, and aren’t freeloaders. With subsidized debt, you can hope to get paid back,and, possibly even make money.

The reason that we have incentives for home ownership is that we want more people to own homes, as opposed to renting. Presumably, we’re trying to spread the wealth, instead of focusing more wealth in the hands of landlords. The same is true of tax credits and loans for college. We don’t want to limit education simply to those that can afford it.

You could cut all these subsidies, and just accept the negative social consequences, assuming that there would be some in your view. On the other hand, you could institute simple transfers of money, like a Guaranteed Income, or giving the less well off the money for a down payment of 20% say. Of course, this would mean that you’re just giving people money.

My solution is just that: give people money. The current system of competing incentives and disincentives is inefficient and, because it’s so complicated, impossible to figure out what is effecting what. We should aim for simplicity and ease of supervision. We should simply transfer money to people through a Guaranteed Income, Down Payment Subsidy, etc. However, the goals of these programs make sense to me, and we shouldn’t forgo aiding the people addressed by these programs.

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By: Lord http://blogs.reuters.com/felix-salmon/2009/07/14/how-to-reduce-the-mountain-of-debt/comment-page-1/#comment-4151 Tue, 14 Jul 2009 18:45:44 +0000 http://blogs.reuters.com/felix-salmon/2009/07/14/how-to-reduce-the-mountain-of-debt/#comment-4151 (I meant a C corp.)

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By: The Reuters Cleaning Staff http://blogs.reuters.com/felix-salmon/2009/07/14/how-to-reduce-the-mountain-of-debt/comment-page-1/#comment-4149 Tue, 14 Jul 2009 18:40:35 +0000 http://blogs.reuters.com/felix-salmon/2009/07/14/how-to-reduce-the-mountain-of-debt/#comment-4149 It’s fine to argue the merits of the deduction. But it’s silly to pretend that repealing it wouldn’t have catastrophic consequences. The deduction makes a huge difference in affordability and that also affects the value of your home. For example, at a 33% marginal rate (state+local+fed) your $250,000 loan (5% and 1.25% property tax rate) would cost $1600 the first month, but only about$1260 after it.

If there were no deduction, that same $1260 payment would buy you only about $195,000 worth of house. This translates into about a 22% reduction in home value, enough to send many homes under water (if they’re not there anymore). This is back-of-the-envelope, and the savings obviously go down as you pay off more of the loan, so 22% is probably exaggerated. It’s nonetheless going to be a significant effect.

Aside from the massive political fallout, one effect would probably be to send a lot of people walking away from their mortgages. We’ve already seen how defaults can skyrocket when enough people are doing it that it becomes socially acceptable. Now instead of being confined to certain geographical areas, you could have people all over the country doing it. Not to mention retirees facing huge losses in the expected value of their main investment.

Spreading that reduction over five years doesn’t make it go away or even cause the reduction to smear out evenly, since rational 30-yr mortgage purchasers would price the future loss into their current bids. Maybe if you reduced the deduction over a really long time span (say 30 years) you slow down the effect enough that it would be hidden by normal price appreciation (even the pros often fail to price things in when they’re that far in the future.) But nobody’s going to be “getting rid of” the deduction. We need to look elsewhere for our income— like, say, a new tax bracket for very high earners, or restrictions on offshore tax havens.

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By: Lord http://blogs.reuters.com/felix-salmon/2009/07/14/how-to-reduce-the-mountain-of-debt/comment-page-1/#comment-4148 Tue, 14 Jul 2009 18:35:57 +0000 http://blogs.reuters.com/felix-salmon/2009/07/14/how-to-reduce-the-mountain-of-debt/#comment-4148 One can’t really eliminate business interest tax deductions. Instead lending just goes underground, destroying debt markets but not debt in any real sense. Instead of a borrower receiving a deduction and a lender paying tax, the two combine into a zero net debt entity that pays tax on earnings but not on distributions if not an S corp. For an S corp, a division into operating and capital/debt entities achieves the same result. This makes debt slightly more expensive, but by nothing like the nominal interest deduction, which is not really much of a subsidy at all.

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By: Rockfish http://blogs.reuters.com/felix-salmon/2009/07/14/how-to-reduce-the-mountain-of-debt/comment-page-1/#comment-4145 Tue, 14 Jul 2009 17:56:43 +0000 http://blogs.reuters.com/felix-salmon/2009/07/14/how-to-reduce-the-mountain-of-debt/#comment-4145 BTW, you can just as easily phase it out for everyone as for some. Give everyone 5 years to get over it. The upside consequence is that you’ll ENCOURAGE sales while the full deduction is still in effect, if that’s what you want to do.

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By: Rockfish http://blogs.reuters.com/felix-salmon/2009/07/14/how-to-reduce-the-mountain-of-debt/comment-page-1/#comment-4144 Tue, 14 Jul 2009 17:52:18 +0000 http://blogs.reuters.com/felix-salmon/2009/07/14/how-to-reduce-the-mountain-of-debt/#comment-4144 @Nathan: I’m in your position, so I basically agree. But I have 2 issues. First, if the value of mortgage interest deduction is the difference between someone being able to make their payments and not, they are in over their head anyway.
Second, home values need to correct to a financially sustainable level anyway. The interest deduction was a gov’t carrot invented to encourage home ownership, (which may or may not be the right thing do). Again, if the few thousand dollars (I’m not talking about $million plus mortgages here) in deduction is propping up values, I’d say it’s a yet stronger argument to get rid of it.

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By: A Man A Plan http://blogs.reuters.com/felix-salmon/2009/07/14/how-to-reduce-the-mountain-of-debt/comment-page-1/#comment-4142 Tue, 14 Jul 2009 17:45:58 +0000 http://blogs.reuters.com/felix-salmon/2009/07/14/how-to-reduce-the-mountain-of-debt/#comment-4142 I have to echo the comment immediately above. Pulling the mortgage interest deduction out from under homeowners, at least at this moment, would be an unmitigated disaster since many owners would immediately dump their properties on the market. If something like this is to be considered, it may have to be phased in with new buyers, who could at least clearly calculate the effect on their budget and decide whether to buy or not. I do not think this merely applies to ‘marginal’ buyers and those with low equity; anybody who can not afford the payment once the tax deduction is taken away would be vulnerable.

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By: Nathan http://blogs.reuters.com/felix-salmon/2009/07/14/how-to-reduce-the-mountain-of-debt/comment-page-1/#comment-4139 Tue, 14 Jul 2009 17:28:59 +0000 http://blogs.reuters.com/felix-salmon/2009/07/14/how-to-reduce-the-mountain-of-debt/#comment-4139 Maybe I’m being selfish (as a home owner currently enjoying mortgage interest tax relief) or only looking at the short-term, but wouldn’t repealing the mortgage interest deduction only serve to further depress home prices as well as increase defaults? It will most definitely decrease leverage overall, but the cost could be quite large given the low equity levels many homeowners currently have in their homes. Yes, using a no money down mortgage isn’t a great idea, but that decision was made knowing that the interest on the loan was tax deductible. Changing those rules in the middle of the game seems overly harsh on people who can’t really afford it. A phase in on new mortgages seems a bit fairer to me (though probably impossible to administrate), but that still leaves the issue of depressed home values once the non-deductibility of the mortgage interest is phases in.

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By: dWj http://blogs.reuters.com/felix-salmon/2009/07/14/how-to-reduce-the-mountain-of-debt/comment-page-1/#comment-4137 Tue, 14 Jul 2009 16:28:08 +0000 http://blogs.reuters.com/felix-salmon/2009/07/14/how-to-reduce-the-mountain-of-debt/#comment-4137 @Benedict: There was a Supreme Court decision in the 1800s suggesting constitutional reasons for muni bond tax exemptions, but it was reversed in the 1980s (when it was rescinded for bearer bonds, as a way of pushing munis toward registration systems).

In the short-run, one of the touted benefits of generating a bit of inflation is the effect it would have on over-leveraged balance sheets. A future of encouraging releveraging with a pattern of inflating out of overleverage would simply raise interest rates; the way to eliminate (or at least reduce) overleverage is, as Felix says, not to give tax incentives for incurring debt.

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By: Benedict@Large http://blogs.reuters.com/felix-salmon/2009/07/14/how-to-reduce-the-mountain-of-debt/comment-page-1/#comment-4131 Tue, 14 Jul 2009 15:46:08 +0000 http://blogs.reuters.com/felix-salmon/2009/07/14/how-to-reduce-the-mountain-of-debt/#comment-4131 It’s my impression that municipal bonds are tax-free for constitutional reasons and not due to any enacted tax code provisions.

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