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Capturing My Thoughts: Mortgage interest tax deductions, and a better personal income tax syste,

Made at TDAXP.

On Mortgage interest tax deductions…

Why subsidize homeowners at all over renters? Why subsidize them even more? There is no reason to have any federal mortgage credit. Once again, this is the government distorting economic decisions made by regular people.

Related: Many of the forms I have seen over the years invoke “tax deductability” as a reason to but over renting (or to buy even bigger). Most of those worksheets had the math/tax ramification wrong and therefore nudged people to owning who should not have, or nudged people to buy a bigger house (take a bigger mortgage) then they should have bought.

On a better income tax system…

I think “real change” would be a simple flat tax or perhaps a 2 rate tax on all income. One rate for income up to the Poverty line (or 1.5X Poverty Line), and a second rate for all income above that. No deductions.

I am okay with a Consumption Tax version of the above.

I used to think that such a plan shouldn’t tax income until the poverty level (or something close to it) was reached. I have read info recently showing how people below the poverty line hold/vote overwhelming socialist views/candidates. So, I thin having them pay taxes would be a good education.

I should flesh this income tax thing out.

Also note this interesting idea at the same post by commenter Brent Grace:

Putting aside the recent crash in the real estate prices, I wonder if the encouragement of homeownership places constraints on labor mobility that harms overall GDP growth. Would we be better off as a society of nomadic renters whose primary wealth was largely in IRAs or 401ks? I don’t know, but I’m not longer quite so sure that widespread homeownership is a net positive.

Great thinking! The homeowner constraint does effect the economy negatively in that mobility of deployment/redeployment of Human Capital is slowed and reduced as individuals economic choices are reduced. That has to effect growth.

There are lots of positive reasons to own a house. There are negatives (e.g. maint cost, reduced mobility). The positives and negatives may wash out.

My bottom line: USGOV should not be distorting individual economic choices with regard to renting vs buying (and vs buying how much).

Update – Another comment by me at TDAXP:

If there is going to be a tax on C Corporation type businesses, I would do it as a flat rate against cash flow, not based off earnings.

Earnings can be manipulated all sorts of ways…cash flow reporting not so much. Investors know that cash flow is a better signal then earnings anyway.

The cost of tax compliance would go way down because businesses would not need to keep separate books for different types of earnings reporting (Sec, IRS, States, Investors). Businesses already keep track of cash flow.

A positive side effect of taxing the cash flow is that businesses can get immediate tax benefits from capital spending (capital spending reduces earnings over time – as depreciation – but hits cash flow right away).

A Single Rate Cash Flow tax on businesses could be revenue neutral to USGOV and still be a positive in reduced expenses for businesses and for USGOV.

Of course, most US Businesses pay no income taxes so they would pay no cash flow tax. This harping point by anti-capitalism politicians depends upon most people not noting that most businesses are not C-type corporations – which are the only ones that pay a corporate tax.

Most businesses are S-type corps, LLCs, LLPs, partnerships, or sole proprietorship. For those, earnings flow to the owners where it is then taxed as personal income. So for these, as cash is passed thru to the owners, it could be taxed as income.

As far as personal income taxes, I would also be okay if the income tax was replaced completely with a partial flat tax and partial national sales tax.

Almost any of the reforms you here bandied about are better then the current system.

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