Succeeding Part 9.
We've previously discussed business deductions and interest deductions. In this Part 10, we'll focus more closely on mortgage interest deductions.
Mortgage-interest deductions allow taxpayers to reduce the amount of their income subject to taxation by the amount of mortgage interest those taxpayers paid that year. Here's a simple version of the math:
Frank has taxable income of $50,000, ergo should be assessed federal income tax of 4,617.75 (and $4K of "Social Security" that he'll never collect on, but that's a separate issue--focus just on the federal tax). However, he's paying off his house, so he has a nice, simple mortgage interest deduction of $6K. The deductions drop his taxable income from ~$33K to ~$28K, and his federal tax goes down to $3,717.75. ("Social Security" remains almost completely unaltered, shadow-taxing him for the general banker/bombs fund.)
So, $3,717.75 in federal tax, instead of $4,617.75: Frank saved $900. Why do we care about mortgage interest deductions?
Among many other things, mortgage interest deductions serve as a shadow tax on renters. Presume Frank and Judy have the same job, and live next door to one another. Frank pays $1,000 a month on his mortgage, while Judy rents the same model of house, next door, for $1,000 at month. At the end of the year, with the same income and same house, Frank is $900 richer. By preferencing home "ownership," the government is subsidizing Frank's purchase $900 a year, or alternatively, taxing Judy an extra $900 a year.
This may not seem very important until we add up the roughly 95 million census-worthy Americans who live via rent rather than via ownership. This special tax, levied on those who rent, is not just a theft from those who are too poor to own homes. It is an extraction from those who need to move frequently; from those with disabilities or special housing needs that require some level of supervised living; from those who have "bad credit" (based on private, grossly unfair, industry-preferenced tracking systems); from those who are just starting out in life; from soldiers, convicts, and students. It is, very simply, one of the many institutionalized thefts from the weak.
Without mortgage interest deductions, Americans would buy smaller homes. American homes are already ridiculously oversized. That's easy. A lot more goes into the mortgage interest deduction than just the overblown house, though. We rationalize "mortgage interest deductions" based on the idea of the value to society of home ownership. That rationale is its own separate level of ridiculous, but forget about it--that claim doesn't need to be destroyed in order to understand 99% of the vulgarity of mortgage-interest deductions. Consider:
1) Landscaping. As long as it's wrapped into the mortgage, exterior home treatments of any kind become eligible for the same tax-deductible loans as the bedroom, bathroom, and kitchen. When the tax base subsidizes a home, that's one thing. When the tax base subsidizes someone's natural-stone cascading-waterfall pool decorations, pool, diving board, in-ground hot-tub, greenhouse...what, then? Those things are part of the mortgage. Interest on those items is deductible, ergo not only do renters pay a surcharge to fund the loans for a wealthier person's backyard, hundreds of millions of modest homeowners pay much higher taxes to cover the deductions allowed to those who can take out bigger loans.
Does the "diving board" and "hot tub" backyard example seem ridiculous? It gets better.
2) Electrical wiring. Built-in entertainment centers. $56,000 granite kitchens with industrial gas ranges, artisanal copper potracks, deep freezes, multiple walk-in pantries, and eighteen coordinated Sub Zero stainless-steel appliances. Recessed, cobbled game rooms with full tiled wetbars.
Wall-mounted TVs. Homes pre-wired for surround sound in the master bedroom, the guest rooms, the TV room, the kitchen, and the theater room (and the upstairs kids/"rumpus" theater room, for nights when there are no guests and you just want to wear sweat pants).
3) Casita, anyone? 99%-of-the-time unoccupied guest houses. Flagstone paths between those and the main house's terrace. Half-acre garages (away from the main garage) with temperature and humidity control for the automobile collector. Cute stone fountains, pumping systems, urinating stone cherubs, and brick roundabout drives inside the main security gate. You can easily buy five detached single family residences for the cost of the front courtyard decorations on any one of the places the elites settle for when they're in a certain area of the country at a certain time of year.
4) Fitness. The "fun pool," where people from the foundation stand around for cocktail parties, is different than the indoor lap pool, and the workout room with the strength machine and stairclimber is different than the fitness room with the nice air conditioning and cushions (that's where little Mikey and Gabby, respectively, can practice for the Olympics, and get better than all those nasty third-world kids without tumbling mats and pools). Just like the "charitable expenditures" discussed in the last part of State, Church, School, Charity, the "American family homestead" myth is used to make almost everyone--even owners of large, nice homes--pick up a large part of the bill for the palaces of the elite. The obscene mansions and playgrounds are not built by one set of hands, but by many.
5) Construction. All the companies that make all the crap to decorate and fill mansions survive only on the welfare of "subsidized" (paid-for) loans to wealthy families. Without forcing the taxpayers to pay for their extra toys, elites would buy fewer toys, and their toy companies would be forced to compete in something closer to a free market--and would then fail.
Elites would borrow less money if their borrowing weren't being partially paid for by peons, ergo elite banks would get less powerful. All of the non-working varieties of wealth would take a serious hit if all of the forms of "deduction" were restructured. Eliminating just mortgage interest deductions, or adding a token rental deduction to the code, would be a showy nothing without entirely rewriting modern tax codes (elites would just start renting palaces at a higher rate, exploiting the same imbalances that allow them to take advantage of middle class deducters under the current regime), which is why we may see some cutesy variation of an "Affordable Renting Act" feigning change in the years ahead (as always, assuming we don't hit post apocalyptic solar-motorcycle-gang survival-mode first).
6) Refinancing. What happens if the mortgage gets paid off, and those wonderful deductions are no longer available? Refinance! Instantly free up a vast amount of cash, invest it in securities, and offset the resulting dividends by mortgage-deducting the interest "paid" to the bank--all the while, both the refinanced home and the securities are accruing non-taxable capital gains income.
Intergenerational Income Transfer
A smaller variation, in closing: inter- or intra-familial loans. When wealthy older members of a family "retire" from their show jobs as corporate or political managers, their income artificially drops. Living off long-term capital gains, making regular charitable contributions, and deducting mortgage interest on palatial properties, many of the minor nobility are able to drastically lower, or occasionally even eliminate, their U.S.-allotted taxable federal income. The younger members of the family, though--junior art directors, ms. communication correspondents, niece technology consultants, and nephew project managers--live off a combination of inter-generational rent-gifting and rapidly bloated salaries.
Those casual six figure salaries leave the little George & Jacob & Chelsea brats in the "higher" income tax bracket, which is designed to extract earned income from the few professionals still clinging to "middle class" on virtue of salary alone. (For more on this, see Wealth and Power, Part 2.)
To protect all our little Dubyas from paying the same income tax rate on their sudden high managerial salaries as middle-class-spawned physicians and engineers, Dubya (or his equivalent) borrows money from Mommy and Daddy, or Mommy and Daddy's friends, to pay for a nice home (as well as some other business expenses, but focus just on the home for now). Bingo! Dubya's taxable income is reduced by the full amount of the interest he's "paying" to Mommy and Daddy. Mommy and Daddy's taxable income goes up that amount, but they're paying in a lower bracket (or no bracket, if they're working really hard at philanthropy), so the family as a whole sees a big benefit. The interest that Dubya had to "pay" to Mommy and Daddy will be returned to him later as a gift or inheritance, tax free, while everyone else will make up the "shortfall" by paying extra to the IRS to cover Dubya's deductions.
(If we're even savvier, we know that Dubya can make it look even more "fair" by taking that very same home loan from a bank, in which he, his family, or familial friends own stock in. The interest he "pays" to the bank will later translate into 15% or 0% capital gains income gifted to Dubya, or inherited by Dubya, years later.)
This kind of sneaky crap is not available unless you have the wealth to pull the levers. The constant payroll-, quarterly-, or yearly theft from peons, backed up by police home invasion and the imprisonment/rape of non-payers, keeps the drones flying, the military invading, the laboratories inventing new products, and the factories churning out new crap, while the deduction regimes protect important people from having to ever pay anything remotely approaching their share (even "their share" of the elaborately expensive, atrociously hideous structure for which the taxes pay).
As covered in part in Wealth and Power, anyone, anywhere, who discusses "taxes" or "the economy" or "tax rates" without addressing the wholly, unavoidably intrinsic nature of taxing "income," rather than "wealth," is grossly misinformed; any prominent figure who does so is either misinformed, or more likely, greatly and cleverly informed, but on the payroll.
There are no "loopholes." Loopholes is how to explain things to a peon so that she or he thinks you're addressing their concerns. There are no "loopholes," because all western tax codes are written to achieve the end of causing workers to pay and owners to collect. Banks refuse to operate where tax codes are fair, because fair tax codes result in no banks. The token "loopholes" that are closed (usually for regime-shopping corporate profits) are like the guys walking around the County Fair pretending they won an honest prize. Don't believe it, anymore than you would believe mass child murderers who tell you they're trying their best to help.
Continued in Tax Theft 11.