Tax Reform in the UK
Kevin Drum laments that we can’t curb dumb tax preferences for debt. Felix Salmon counters:
The weird thing is that this really is within the realm of the possible — the UK, for instance, abolished mortgage-interest tax relief in 2000, a move which had no visible effect whatsoever on either house prices or homeownership, but which did wonders for the exchequer.
But here, again, political institutions come into play. The US and UK are similar societies in many respects (as far as these things go) but we have very different political institutions. Something like the mortgage-interest tax deduction thing is basically a case of ripping off a band-aid. A government that went ahead and did it would face an outcry, but most people would wind up better off soon enough and there’d be no good reason to put it back in place.
The American legislative system, however, is not a good venue in which to attempt to rip off a band-aid. Nobody wants to propose such a thing, provoke an outcry, and then have it not happen. And the odds of getting 60 votes in the Senate for anything more controversial than a vote in favor of mom and apple pie are pretty thin. Consequently, bad policy can just sit there on the books with everyone afraid to peek their head over the ramparts lest it get shot off.
25 Responses to “Tax Reform in the UK”
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July 15th, 2009 at 9:35 am
Not to dispute Drum’s overall point, but surely abolishing the tax had some impact on housing prices?
July 15th, 2009 at 9:36 am
So, it seems that encouraging home ownership has been ditched in favor of taking more taxes. Well, here’s something tailor-made for the folks here, a proposal for formalizing the income tax rate on the bottom 60% to zero.
July 15th, 2009 at 9:37 am
I am convinced you are right on this, and your other comments on the structural problems with US government (and state and local), but I do not get any sense that there is a movement afoot to do anything about it.
Is there any indication that anyone in government is even considering making incremental changes that would be more favorable to progressive legislation?
Is there any indication that an Obama second term might start pushing for the structural changes that would make a lasting impact on the quality of governance?
July 15th, 2009 at 9:41 am
Mortgage interest tax relief was phased out over time in the UK which tended to lessen the outcry at the outset and subsequently and also made any effect less ‘visible’. There is pretty good reason to believe the house price boom and subsequent crash would have been bigger in the UK if we still had it.
July 15th, 2009 at 9:41 am
Yeah the Senate rules suck and prevent us from doing anything worthwhile. We get it already. So what’s a realistic way to overcome this so we can actually get back to passing bills with 51 votes again?
July 15th, 2009 at 9:52 am
How about this: pass a law in the U.S. that eliminates the mortgage interest deduction for any mortgage that closes one year after the law passes. The deduction is gone soon, existing mortgages are grandfathered in, and no new homeowners can complain that it occurred without warning. On top of all that, and suddenly the housing market is lively again as potential owners scramble to buy within the twelve-month window.
July 15th, 2009 at 9:53 am
This meme that our political and thus policy failures are caused by the political structure has some merit. On the other hand the US muddled through for 200+ years on a path of relative success vs the rest of the world with that structure. No, the problem runs deeper and goes along with the stories of all great empires which have fallen. Make no mistake, the US is an empire. If empires and Republics don’t mix is a truism remember that still, all empires eventually decline.
July 15th, 2009 at 10:03 am
The problem here is not the Senate or the filibuster. The problem is that a repeal would wreak havoc with every single legislator’s major constituency. You might have the support of, perhaps, a few super-urban districts with low home ownership rates. A slow repeal might work (as the British found), but inducing pain is not the way to go about this.
July 15th, 2009 at 10:17 am
Much of the difference was that abolishing MIRAS was the policy of both Labour and Conservative parties. To mirror the UK outcome in the US, you would need the Republican party to propose it and I just don’t see that happening.
July 15th, 2009 at 10:51 am
Or, you know, less super-urban districts where housing prices aren’t high enough to make the mortgage interest deduction significant. It’s a deduction, not a refundable credit. For married filing jointly, you’re talking about a new fixed-rate mortgage of close to $200,000 at current rates to get a year’s interest to equal the standard deduction. And the interest is a progressively smaller piece of existing mortgage payments.
However, this:
is fairly accurate, since high-income constituents who are the primary beneficiaries do tend to be the major constituency for members of Congress.
July 15th, 2009 at 11:00 am
What Matt probably doesn’t want to admit is that the mortgage deduction is politically untouchabe for similar reasons that Social Security is politically untouchabe. It is a middle class entitlement on which many people have relied in making major decisions about their lives. That one is good public policy and the other not so much is almost irrelevant to the politics.
July 15th, 2009 at 11:03 am
Matthew is full of shit. If you merely limited the mortgage interest deduction to around $15,000 or so, the vast majority of people would not be affected.
The only people you would be taxing are the wealthy. The problem is that Democrats suck up to their wealthy campaign donors just as much as do the Republicans.
July 15th, 2009 at 11:06 am
It is a silly time to do it, and doing it fast is a silly way to do it.
You pick a time when it will go into effect. You phase it out slowly, under two different schedules – one for mortgages taken before date x, and a faster phase-out for later mortgages.
If you pull the band-aid off quickly, you’ll wreak havoc, and someone will put the band-aid back on again in order to win an election.
July 15th, 2009 at 11:13 am
Correction: Matthew is not full of shit. However, this post is too full of metaphors. Band-aid? o.k.; ramparts? not so much.
A cap on tax decductions (generally, not just mortgages) is nevertheless a good idea, should make the alternative minium tax unnecessary.
July 15th, 2009 at 11:34 am
MIRAS in the UK was never remotely as generous as the mortgage interest deduction, nor did it concentrate its benefits so narrowly on the affluent as the US policy does.
If there is any cause for optimism, it’s that history shows it is possible to tinker around the edges with the mortgate interest deduction, as long as you limit the impact to the highest-income taxpayers. For instance, the deduction used to apply to mortgages on vacation homes! Also, a number of other deductions and credits have been curbed at the upper end by phase-outs.
July 15th, 2009 at 11:38 am
Hey Nimrods, mortgage interest is already capped and the AMT nabs anyone with excess deductibles. What you want has already happened. Get with the program people.
July 15th, 2009 at 11:52 am
16: Hey shooter242, who said anything about capping as the be-all and end-all. Progressive critics of the MID tend to be as much or more concerned about the regressive impact of the deduction structure (worth more to high-income filers, and nothing to the poorest). You might try informing yourself a little bit about the terms of the debate a before you go throwing around accusations of ignorance.
July 15th, 2009 at 12:15 pm
From shooter242’s link, this is pretty awesome:
Since you cant deduct interest on credit card loans and personal loans(consumer debt), home equity loans have become increasingly popular. That is because the interest on these loans, too, is deductible.
[...]
Here’s the beauty of home equity interest: How you use the money is irrelevant. Money can be borrowed for vacations, parties or to pay off other debt.
What could possibly be the public interest in allowing HELOCs to be tax deductible? Or if there’s no way to separate first mortgages from subsequent ones (I guess they are all just loans with one’s homestead as collateral), then doesn’t this hilariously unintended consequence of the mortgage interest deduction further water down whatever dubious benefit it had to begin with?
July 15th, 2009 at 12:28 pm
Yeah, right, at one million dollars. How many Americans have million dollar mortgages? I know a number of very wealthy people and none of them has a mortgage even close to that figure.
It’s more a cap in theory than it reality.
July 15th, 2009 at 12:34 pm
And you’re telling ME to be more informed? The bottom 40% of households pay virtually no income tax and some get checks from the government via EITC and child care credit, to cover even their FICA.
If someone doesn’t pay income tax, what difference does it make if they don’t get a deduction? This is as off-the-wall as complaining that people who don’t pay taxes, didn’t get tax cuts.
July 15th, 2009 at 12:39 pm
Hey Tacitus,
That’s interest on a million dollar house, not a million dollars interest. And here in DC, a million dollar house will get you 1000 sqft and no parking.
Keep up the good work.
July 15th, 2009 at 3:32 pm
shooter242 Says:
And you’re telling ME to be more informed? The bottom 40% of households pay virtually no income tax and some get checks from the government via EITC and child care credit, to cover even their FICA.
Yes, because you have no clue about the difference between income tax and federal withholdings on earning also know as the Pay Roll tax.
July 15th, 2009 at 4:16 pm
The bottom 40% of households pay virtually no income tax
…thus making deductions from gross taxable income a singularly unsuitable method of channeling housing subsidies (and that’s what the MID is: a housing subsidy) to the homebuyers who need it most.
Look, shooter, if your political preferences lead you favor a system that channels money to the already well off and excludes the poor, fine, but don’t try to pretend the MID is anything other than that. For those of us in the forum who care about progressive outcomes (and I take it I can fairly exclude you from that group), the MID is a poorly designed policy. Take your trollery and namecalling elsewhere.
July 15th, 2009 at 5:59 pm
And you folks are very entertaining.
The bottom 40% as homebuyers? We are in the midst of a housing crisis due in part to the failed notion that the poor can buy houses and pay mortgages.
Channels? Gad. Keeping more of what one earns is not equivalent to getting a grant.
Actually the MID is terrific policy if one thinks home ownership is a good way to vest responsibility for the community, into the citizenry. But maybe that’s not a progressive outcome. In any event you should be glad I’m here to point out things like already possessing something like a cap, rather than continued whining in ignorance.
As for the poor they already get cash money from the Government. There’s food subsidies, housing subsidies, health clinics, Medicaid, energy subsidies education subsidies, etc, etc, etc. paid for by the top two quintiles of taxpayer. What else do you want?
July 16th, 2009 at 10:49 am
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