Mortgage Interest and the "Fair Tax"
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A bit of a spat between Rudy Giuliani and Mike Huckabee:
I blogged about the mortgage interest deduction previously. The precis: It's an unwarranted, politically based, warm fuzzy feeling deduction that should never have been introduced in the first place. But now that it has been around for decades, it would be fundamentally unfair to repeal it (what the law calls "detrimental reliance").
The far more ironic observation regarding this kerfuffle is that no one — not Huckabee, not Giuliani and not even the Tax Foundation — seems willing to observe, or perhaps even to know about, a pesky fact:
Under a national sales tax, not only would mortgage interest no longer be deductible, but it would itself be subject to the sales tax. Mortgage interest would convert from a tax advantage to a tax burden.
What part of "a tax on all goods and services" is unclear? Well, when you take out a mortgage — or any loan, for that matter — the bank is "selling" you a service (i.e., financing). The price you pay for that service is the interest. So that gets taxed, no different than buying a Happy Meal, or diapers, or a college education, or an emergency appendectomy. Everything gets taxed. Everything.
And that tax on the mortgage interest would, of course, be on top of the tax levied on the price of the home itself (the property is the "good" while the financing is the "service" — but both get taxed).
The other dubious aspects of the "Fair Tax" — such as the flat-out lie about it being 23% ("0.3/1.3=0.23" is a 30% tax, not a 23% tax) and about how the actual tax rate would have to be as high as 82% to be revenue-neutral — are already noted here.
As for mortgage interest, debates about whether the deduction was wise or equitable ex ante are all well and good, but relative to the "Fair Tax," two wrongs can hardly be described as a right.
Bottom line: Take care of tax rates, and tax fairness will take care of itself.
Republican presidential hopeful Rudy Giuliani criticized the "fair tax" plan that has been touted by rival candidate Mike Huckabee on Monday, saying it could hurt home buyers.Huckabee supports the national sales tax plan, pompously labeled by its proponents as the "Fair Tax." The Tax Foundation, a group that I generally consider an ally, screeches against Giuliani here.
The former New York City mayor cited the struggling U.S. housing market as a reason to avoid the plan, which would eliminate all taxes on income and investments in favor of a hefty federal sales tax.
...
"This would not be a good time — I don't know if there would ever be a good time to do this — to advocate ending the home mortgage deduction. The home mortgage deduction is considered by many critical to the ability of people to buy a home and keep their home."
I blogged about the mortgage interest deduction previously. The precis: It's an unwarranted, politically based, warm fuzzy feeling deduction that should never have been introduced in the first place. But now that it has been around for decades, it would be fundamentally unfair to repeal it (what the law calls "detrimental reliance").
The far more ironic observation regarding this kerfuffle is that no one — not Huckabee, not Giuliani and not even the Tax Foundation — seems willing to observe, or perhaps even to know about, a pesky fact:
Under a national sales tax, not only would mortgage interest no longer be deductible, but it would itself be subject to the sales tax. Mortgage interest would convert from a tax advantage to a tax burden.
What part of "a tax on all goods and services" is unclear? Well, when you take out a mortgage — or any loan, for that matter — the bank is "selling" you a service (i.e., financing). The price you pay for that service is the interest. So that gets taxed, no different than buying a Happy Meal, or diapers, or a college education, or an emergency appendectomy. Everything gets taxed. Everything.
And that tax on the mortgage interest would, of course, be on top of the tax levied on the price of the home itself (the property is the "good" while the financing is the "service" — but both get taxed).
The other dubious aspects of the "Fair Tax" — such as the flat-out lie about it being 23% ("0.3/1.3=0.23" is a 30% tax, not a 23% tax) and about how the actual tax rate would have to be as high as 82% to be revenue-neutral — are already noted here.
As for mortgage interest, debates about whether the deduction was wise or equitable ex ante are all well and good, but relative to the "Fair Tax," two wrongs can hardly be described as a right.
Bottom line: Take care of tax rates, and tax fairness will take care of itself.
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Posted by Kip on
4 December 2007
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