Time to Rethink Homeownership Preferences

November 13, 2012

Several months ago, I was sitting at our dining room table and thought I heard raindrops while my husband was showering. Turns out I was hearing water running down the inside of a wall from a pipe that had been leaking for some time.

So parts of the pipe had to be replaced, of course. Also the rotted drywall, plus an unrotted portion that the plumbers had sawed out. And the whole dining room-living room area had to be repainted because the new drywall would otherwise look lighter.

Got me to thinking about costs of homeownership we don’t read much about — and more generally, about how our public policies tend to push people toward a housing choice that, for many, may be personally unsuitable and/or financially imprudent.

Consider, for example, the federal income tax code. People who sign on to a mortgage get to deduct the interest they pay, plus “points,” i.e., upfront interest that cuts the mortgage rate. Also what they pay in real property taxes.

These are fine examples of¬† “upside down” tax policies — so called because they deliver the most to those who need it least.

High-earners get the largest deductions because their top tax bracket is higher and they generally buy costlier houses.

Also multiple houses. And they can take interest deductions on the first $1 million they owe for two of them.

Low-income filers who’ve managed to get a home loan get a much smaller tax benefit — less than $100, on average, from the mortgage interest deduction, according to a Center for American Progress brief.

In many cases, this cuts their tax liability less than the standard deduction they can take instead. Which one reason some economists say that the mortgage interest deduction doesn’t promote homeownership — only the purchase of costlier homes.

There’s, of course, no tax preference at all for people who indirectly pay mortgage interest and property taxes as a portion of their rent.

And they generally can’t deduct interest on other debt they incur, except for student loans.

Homeowners who borrow against their equity can — interest on as much as $100,000-worth of debt, no matter what they use the money for.

These policies don’t spring out of nowhere. Owning a home is a key element of the American Dream.

We pay more than twice as much to support it, through the tax code, as for all programs administered by the U.S. Department of Housing and Urban Development, CAP says. And the Center’s talking only about the mortgage interest deduction.

This deduction alone cost the federal government an estimated $140.5 billion last year — more than any other tax expenditure except the exclusion of employer-provided health insurance from what the Internal Revenue Services counts as income.

So there’s a good fiscal argument for blowing away the homeownership preferences — if not altogether while our economy in general and the housing market in particular are still so shaky, then when our recovery seems reasonably secure.

But I think there’s a broader argument as well.

Homeownership is fine for those who can afford it — not only the mortgage, the insurance and the taxes, but the unexpected expenses like leaking pipes and fires.

Fine for those who are quite certain they want to sink roots in one place — and can uproot if they need to, even if housing prices fall.

But we can have secure, stable communities and residents who engage in civic activities, go to PTA meetings, etc. without distorting housing choice incentives, though interested parties say otherwise.

We read that younger people aren’t embracing homeownership the way they used to. Perhaps, as some experts suggest, we’re witnessing “the creation of a generation of renters” — and thus a partial redefinition of the American Dream.

I think this would be a healthy thing for individuals, communities and our society as a whole.

Surely it would be healthy to rebalance public policies and our collective narrative of middle-class success so that signing a lease becomes every bit as good as signing a mortgage contract.


Who Are Those Folks Who Don’t Pay Federal Income Taxes?

October 25, 2012

You recall, I’m sure, the 47% of Americans who don’t pay income tax and thus can’t be persuaded to “take personal responsibility and care for themselves.”

Romney’s since said his statement was “completely wrong” — undoubtedly referring to the part that wrote all these people off because the part about 47% not paying federal income taxes is basically correct. Or would be if we substitute “households” for “people.”

The Center on Budget and Policy Priorities dug into data from a Census survey and the Tax Policy Center to find out who they are.

Not surprisingly, 22% of the non-payers are elderly — many of them presumably former low-wage workers now trying to get by on Social Security benefits or very elderly people who now rely on Social Security because they’ve exhausted whatever they had in retirement savings.

But the tax code gives seniors some special preferences. Their standard deduction is higher, for example. And all or some portion of their Social Security benefits may be tax-exempt.

These preferences, plus a credit for those with low incomes help explain why so many elderly filers wind up not owing anything.

Another 17% of the non-payers are students, people who aren’t working because they’re too sick or too severely disabled and some heterogeneous others, e.g., jobless workers, those who retired early (maybe because they couldn’t find jobs.)

Which leaves a surprising 61% who are working, as indicated by the fact that they pay, through deductions, the taxes that go to Social Security and Medicare.

About half of these people don’t pay federal income taxes simply because they don’t earn enough. The standard deduction, plus however many personal exemptions they’re entitled to brings their taxable income down to zero, as Roberton Williams at the Tax Policy Center explains.

Another 30.4% of working families, especially those with children don’t owe federal income taxes because the Earned Income Tax Credit, the Child Tax Credit and, in some cases, the Child and Dependent Care Tax Credit wipe out whatever tax they’d otherwise owe.

I personally have some difficulty understanding why I should be able to claim a higher standard deduction just because I’ve managed to live past the age of 65.

The tax breaks for working families are an altogether different story.

Anyone, I think, can understand why federal policymakers — Republicans as well as Democrats — decided to give low-income parents an incentive to work instead of relying on welfare benefits.

Also why they expanded the incentives when they ended welfare as we knew it, putting time limits on the benefits and setting the stage for the extraordinarily low level of support they now provide.

What’s difficult for me to understand is why Congressional Republicans — and apparently Romney as well — want to let the EITC and Child Tax Credit revert to their narrower pre-Recovery Act forms.

These, after all, are tax preferences that support core bipartisan values — work, marriage, child rearing, etc.

They also, in and of themselves, reduce the official poverty rate, as CBPP’s analysis of the 2010 Census figures shows.

If their end result is some 11.5 million or so working families owing no federal income taxes, that’s mainly because our policymakers prefer spending through the tax code rather than directly, as outlays in the annual budget.

Has nothing whatever to do with defects in personal responsibility — or, it seems, lead to solid support for the President, though some might say it would if the 47% voted their enlightened self-interest.


Do Taxes Have to Be So Damn Complicated?

April 17, 2012

I spent two and a half horrible days last week preparing my 2011 federal tax returns.

Worst of it was trying to answer questions my tax software was asking — and not because I hadn’t diligently squirreled away the mass of documents I thought I’d need.

It was the questions themselves — so many and some so perplexing, though I was quite sure I was supposed to know the answers.

Bookending the apparently relevant questions were long lists of potential deductions and credits I had to skim lest any apply. None did.

By the end of the process, I was ready to endorse a flat tax — that perennial favorite of far-right politicians and their think tanks. Well, not really.

But I truly was half-ready to get on board with Congressman Paul Ryan’s tax reform plan — not the rate reduction part, but the clean-out of the tax code that he claims would pay for it.

Shows how doing your taxes can drive you crazy.

As you’ve probably read, Congressman Ryan hasn’t said what tax breaks he’d get rid of. Nor has Mitt Romney, whose tax reform plan looks a lot like Ryan’s.

Smart move on their parts because the most costly tax expenditures — the technical name for policy preferences promoted by foregoing revenues — aren’t in those lengthy lists I skimmed.

They’re widely-applicable exclusions, deductions, credits and the like — employer-paid health insurance benefits, interest on home mortgages, contributions to retirement plans, etc.

Can you imagine the outcry if Congress decided to eliminate them?

And arguably it shouldn’t — not, at least, without making other policy changes to support the same goals.

The Earned Income Tax Credit, for example, is one of the largest and most effective anti-poverty programs we’ve got. In 2010, the Census Bureau reports, it lifted 5.4 million people above the poverty threshold.

Other tax expenditures also support major priorities, e.g., encouraging savings for a college education and retirement, home ownership, charitable giving.

But tax expenditures cost the federal government a lot — nearly $1.3 trillion this year alone, according to Donald Marron at the Tax Policy Center.

Some of them smack of nothing but successful lobbying — the now-famous corporate jet tax preference, for example, and a special deduction for alpaca breeders. Yes, really.

Seems to me we should get rid of these, though the savings would be relatively piddling.

But what about the more costly tax breaks that we who file as individuals may claim? There are good arguments against them too.

First off, most of them make our tax system less progressive since deductions are worth more to people with higher incomes.

A family in the top bracket, for example, gets more than twice the benefit per dollar paid in mortgage interest as a family in the 15% bracket. And, of course, families at the bottom of the income scale get nothing because it’s all they can do to afford a place to rent.

Second, economists say that tax preferences are generally inefficient. Those top-dollar individual benefits in particular are a waste of money because they reward people for doing what they’d do anyway.

Also, I should add, reward what we’ve no good reason to reward at all. Why give up needed revenues to reward a family for buying a vacation home in, say, La Jolla — or, for that matter, a yacht?

Top of my list, however, is the lower tax rate on long-term capital gains and qualified dividends — much on my mind after laboriously itemizing these.

I’ve never understood why tax policy should prefer wealth over work. The argument that the policy encourages the kind of risk-taking our economy needs seems to me stuff and nonsense.

What would we do if the money our money earns were taxed at the same rate as money we earn by working? Put in under the mattress?

The President, as you know, is pumping the Buffett rule. And surely it’s reasonable to collect a reasonable amount from millionaires — and billionaires like Buffett.

Nearly a quarter of them, we’re told, paid at a lower rate than comfortably middle-class filers during the most recent year the Internal Revenue Service can report on.

But we wouldn’t need yet another complexity in the tax code if we’d merely apply the same rate to investment income as to income earned by the sweat of the brow.


Bush Tax Cuts Anniversary Day

June 7, 2011

This is the 10th anniversary day for the first round of Bush-era tax cuts. Whether an occasion to celebrate depends on how you feel about the results.

On June 7, 2001, President Bush the Second signed into law a package that reduced income tax rates to the levels we’ve got now — thanks to the two-year extension President Obama and Congressional Republicans agreed on last December.

Also in the package were a number of other changes in the tax code, including a repeal of the deductions limit for high-income filers, a partial fix of the so-called marriage penalty and a phase-out of the estate tax — the last brought back from the grave, but in weakened form as part of last December’s deal.

Altogether, lost revenues totaled an estimated $1.35 trillion for the first 10 years.

Bush had campaigned on a promise to return what then seemed a large, growing budget surplus to the American taxpayers who had created it. And surpluses were still projected when the tax cut package began wending its way through Congress.

But the boom of the late Clinton years had given way to a recession. The surplus was shrinking, as tax revenues dropped. The unemployment rate was rising. So the tax cuts were now justified largely as a way to stimulate the economy. Sound familiar?

Most (but not all) Congressional Democrats sounded alarm bells at the size of the package. Also at the distribution of benefits. Because, of course, the reduced tax rates left much more money in the pockets of the wealthiest than in those of low and middle-income filers.

Some Senate Republicans also choked at the price tag. But at the end of the day, key members of both parties forged a compromise. The President declared a victory. And two years later, Congress passed a second round of tax cuts, including the large reductions in capital gains and dividends rates that were also extended last December.

Well, that was then and this is now. And many things have happened since 2001 — some more predictable than others.

Another recession predictable — though probably not as large as the one still afflicting our economy. Stresses on Social Security and Medicare predictable.

But who could have known, 10 years ago today, that some rogue fanatics were about to crash planes into the World Trade Center and the Pentagon? Or that President Bush would decide the response should include invasions of two foreign countries?

The surplus has turned into a ballooning deficit. We’re told that the biggest drivers, in the long run, are rising health care costs.

But, according to analyses by the Center on Budget and Policy Priorities, the Bush tax cuts are the single largest factor in what the country will owe in 2019, barring significant policy changes.

Changes there will be, however. And they’ll surely be more drastic than they’d have been if President Bush had decided to commit more to debt reduction than tax reduction. Which isn’t to say the current crop of Congressional Republicans wouldn’t have aimed for big spending cuts if he had.

Here’s another thing that’s happened in the last 10 years. The income gap between the wealthiest and the rest of us has turned into a yawning gulf.

According to another CBPP analysis, the average after-tax income of the wealthiest 1% of households rose by an inflation-adjusted 281% — $973,100 more per household — between 1979 and 2007.

By contrast, households in the middle fifth of the income scale gained $11,200 or 25%. The bottom fifth gained, on average, 16% — a measly $2,400.

A major factor here is that the wealthiest 1% simply made a whole lot more money. Between 2002 and 2007, their incomes grew 10 times faster than those in the bottom 90% of the income scale.

But the Bush tax cuts played a role too. In 2007, they enabled that lucky 1% to hold onto an extra $41,007, raising their after-tax income by 5%.* Those in the bottom fifth of the income scale received cuts averaging $24 — an after-tax income boost of 0.4%.

And (hold onto your hat) the 400 wealthiest taxpayers in the country paid, on average, 16.6% of their income in individual federal income taxes — down from 30% in 1995. The difference, says CBPP, amounts to an average tax cut per filer of $46 million. And that’s just for 2007.

So, yes, everyone with earned income got a tax break 10 years ago. Many got several. And many got some more two years later. But are we, as a nation, better off?

Perhaps, as an old friend says, what you see depends on where you stand. I’ll bet the tax cuts look better on the deck of a yacht than in a food pantry line.

* More recent figures from the Economic Policy Institute show that, recession notwithstanding, tax cuts for the top 1% of filers increased to an average of $520,000 in 2010.


The Budget Debate We Could Be Having

March 13, 2011

Arianna Huffington rightly calls it “the incredible shrinking budget debate.” She’s referring, of course, to the controversey about how much and where we’ll cut federal non-security discretionary spending.

The debate is shrinking — or more precisely, shrunk — for two reasons.

First, as I and many others have said before, it’s focused on a small fraction of the federal budget — and not the parts that are driving the deficit upward, e.g., health care costs, military spending. We could blow away the entire non-security discretionary part and barely make a dent.

Second, the current debate is focused almost entirely on the spending side of the ledger.

Republicans in Congress are dead set against tax increases of any sort. Indeed, on the House side, new rules pave the way for more tax cuts — and without offsets to keep the deficit from rising.

But what about the Democrats?

President Obama says he’ll push against a further extension of the Bush-era tax cuts for families earning more than $250,000 a year and the estate tax changes that benefit only the very wealthy.

But he’s still celebrating the extension of all the other tax cut extensions — an indication, I think, that he won’t back off his campaign promise not to increase taxes on the (generously defined) middle class.

Tax cuts for them represented a far larger portion of the costs of the December compromise than the tax benefits for the wealthy — $485 billion versus $139 billion, according to a Center on Budget and Policy Priorities analysis.

Presumably they’d again cost much more if extended past 2012, when all the cuts are due to expire. And, of course, there’s no way the President will get them extended without agreeing to keep the rest alive — unless the next elections produce a huge party shift in Congress.

So either the deficit soars or spending gets even more savagely cut.

On the positive side, the President would like the corporate tax code simplified. The Tax Foundation reports that the current plethora of deductions, incentives and the like will cost $102 billion this year.

But the President says he’d use the savings to lower the corporate tax rate, not to reduce the deficit. Perhaps because he wants a corporate buy-in and some Republicans at the table. As New York Times columnist Paul Krugman has observed, he has a history of “negotiating with himself” before the bargaining begins.

But that’s not the total story.

The President has gotten unfairly bashed for not incorporating the recommendations of his fiscal commission into his proposed Fiscal Year 2012 budget. But he’s apparently adopted a key part of the framework proposed by commission co-chairmen Erskine Bowles and Alan Simpson.

As CBPP’s top experts explain, the Bowles-Simpson plan skews toward deep program cuts. They’d represent more than two-thirds of savings through 2020, with about 21% coming from non-security discretionary spending.

And the two-to-one ratio is reportedly what we see in the President’s proposed Fiscal Year 2012 budget –or pretty close. Tax Policy Center Director Donald Marron says the revenue side seems somewhat more than one-third.

Why limit tax increases to one-third or so of a deficit reduction plan — especially when the baseline reflects a decade of tax cuts? So far as I know, it’s just an unexplained policy preference.

What if the tax breaks — corporate and individual — were viewed as less important than the needs of low-income people?

The Center for American Progress has an interesting table that pairs the total current costs of some of the safety net programs the House Republicans have targeted with the revenues lost due to some tax breaks that benefit “the wealthy,” including corporations.

It’s an eye-opener, though some of the pairings are, to my mind, a little dicey. We learn, for example, that:

  • Per-year lost revenues due to the recent tax cuts for very wealthy estates would more than pay for early childhood education programs.
  • Eliminating the loophole that allows hedge fund managers to pay taxes on what’s essentially salary income at capital gains rates would yield more than enough revenues to cover homelessness assistance grants.
  • The cost of extending “alcohol fuel,” e.g, ethanol, tax breaks is nearly double the current spending level for community health centers.
  • All the programs CAP identifies could be paid for by the first year of savings from not extending the Bush-era tax cuts for high-income filers.

Huffington concludes that the current budget debate is going to end with “lots of unnecessary suffering” because that’s what “those who control our political debate” have chosen.

I’d like to think she’s wrong, but it’s hard to envision a shift big enough and quick enough to yield a different outcome.


House Jobs/Tax Bill Spells Trouble

May 30, 2010

As many of you probably know by now, the House passed the latest version of the jobs/tax cut extender bill just before it broke for the Memorial Day recess.

The Senate had already packed up. So, once again, jobless workers dependent on expanded unemployment benefits will, at least temporarily, be without checks.

But that’s hardly¬† the worst of it. The bill that passed had suffered several surgical excisions to satisfy the requisite number of deficit-obsessed Blue Dog Democrats.

First, a month was lopped off the UI benefit and COBRA health insurance subsidy extensions. Blue Dogs still hung back. So the COBRA subsidy extension was dropped altogether, along with the extension of the enhanced federal match for state Medicaid programs (FMAP).

I don’t know whether I’m more angry, frustrated or alarmed.

I’m angry about the values the package reflects. The price tag on the bill didn’t have to be reduced by tossing out the COBRA subsidy and FMAP extensions. Lead Democrats could have pared back those tax break extensions–if what Blue Dogs wanted was a smaller bill.

Do we really care more about helping NASCAR race tracks, restaurants and rum producers or about making sure that jobless workers and their families can afford health insurance? Didn’t we just go through the agonies of health care reform to make benefits affordable for more low-income people?

I’m frustrated because anyone concerned about the short-term deficit ought to know that it results from depressed tax revenues as well as spending, including the financing of two costly wars.

The American Institute for Economic Research reports that April 2010 federal tax collections were the lowest for which it could find monthly data. Individual income tax revenues down 44% since just last year. Corporate income taxes down 64%.

It doesn’t take an advanced degree in economics to know that unemployed people typically don’t owe much, if any income tax. Also that they cut back on spending, thus depressing business revenues. They apply for benefits, including entitlements like food stamps. Up goes federal spending.

So how does the House leadership placate some of the deficit hawks? It takes out of the bill further urgently-needed fiscal aid to the states.

Virtually every state has already cut way back on spending to balance its budget. The cuts have imposed pressures on local governments, which were already struggling with their own budget shortfalls. So they’ve reduced spending too–or soon will.

In March, the Center on Budget and Policy Priorities reported that state and local governments have eliminated 192,000 public sectors jobs since last August. They’ve also undoubtedly cut spending on contracts for goods and services. More job losses there.

We’ll see still more job losses in the months to come–an estimated 275,000 in education alone. The ripple effect of these could result in the loss of an additional 82,000 jobs.

But job losses thus far have been somewhat mitigated by FMAP, which has helped states cope with their rising Medicaid rolls and freed up funds for other core programs.

Without an extension, FMAP will expire at the end of the year–halfway through most states’ fiscal years. Both the House and Senate earlier passed FMAP extensions to carry states through their entire fiscal years. So many states budgeted on the assumption they’d have the funds.

Now, as the CBPP’s President says, Congress “may pull the rug out from under them.” As many as 900,000 more jobs are at risk.

Set aside for a moment the human costs–something clearly not top-of-mind for a number of House members. Does saving $24 billion on a six-month FMAP extension make any sense from a deficit control perspective? Sure looks like penny wise, pound foolish to me.

I’m alarmed because the House bill seems a foretaste of things to come. The Senate, after all, needs 60 votes to pass even what got through the House. Over there, the top-ranking Republican on the Budget Committee has already said that we must stop extending unemployment benefits “right now.”

Consider too that emergency funding to avert the impending teacher layoffs has stalled–maybe died–because neither the House nor the Senate sponsor could round up the votes.

What more can we expect as Congress dives into the Fiscal Year 2011 budget? I shudder to think.


DC Council Committee Fast-Tracks Big Tax Giveaway

March 9, 2010

I’d just posted my rant on business tax breaks when the DC Council Finance Committee held a hearing on the proposed Global Security and Aerospace Industry Tax Abatement Act of 2010–the creatively-named tax giveaway package for Northrop Grumann.

Under Council rules, hearings of this sort are supposed to be announced 15 days in advance so that D.C. residents and other interested parties have an opportunity to get on the witness list and prepare their testimony.

The notice for this hearing was posted just six days in advance–two of them weekend days.

Could it be that Finance Committee Chairman Jack Evans didn’t want us to hear from the opposition–or to have their views on the public record? Or did Northrup Grumann, which is playing the competition for all it’s worth, demand cash on the barrel head? Or did Evans decide he’d better get the vote over with before concerns about the adverse budget impacts of the giveaway escalate?

No matter. The hearing is over. Alert opponents did testify. And a couple of co-sponsors are reportedly wavering.

Still, we concerned citizens deserved a fair chance to have our say–and to hear what a broader range of witnesses might have said if the committee had followed the rules.

It’s things like this that lead so many to feel that the political process is rigged. And, at least sometimes, they may be right.


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