On The US Opposition To Mortgage Interest Deductibility For Landlords

Should landlords be able to deduct the interest on the loans they take out to bankroll their property speculation? The US Senate Budget Committee and Bloomberg News don't think this is a good idea, for reasons set out below. Regardless, our coalition government has been burning through a ton of political capital by giving landlords a huge $2.9 billion tax break via interest deductibility, while still preaching the need for austerity to the disabled, and to everyone else.

In an article published on Tuesday, Bloomberg News disagreed: “Now is the perfect time to take on that other inflator of home prices: the mortgage interest deduction.” The Bloomberg article quickly ran through the history of the deduction, which originated more than a century ago at a time when bank loans to finance property investment were relatively uncommon:

The simple fact is that the mortgage interest deduction does not increase home ownership and was not created with that goal in mind. It is a holdover from tax policy dating back to 1913 to deduct all interest expense from income, a policy intended for businesses and farms.

Not any more, obviously. The policy's weakness, Bloomberg says, is exposed by looking at who benefits from it:

“The only households that can claim the deduction are those that itemize expenses, and they are predominantly in higher income tax brackets. This cohort generally doesn't need to rely on the deduction to buy a home and service the mortgage, so it only serves to push up the amount of debt they can take on and, as a result, [to push up]home prices at the middle and top ends of the market.”

In December 2022, the Budget Committee of the US Senate

released a 1,218 page research report on the country’s tax policies, and at pages 384-385 of that document, I found this fascinating commentary, which came with supportive income tables. For starters, the Committee pointed out, the policy does not deliver to renters anything comparable to the benefits it confers on wealthy investors:

Renters may not deduct any portion of their rent under the federal income tax.... Because a minority of taxpayers itemize, and because the mortgage interest deduction does not address the biggest barrier to homeownership—the down payment—its impact on the home ownership rate is likely small. The deduction, however, may encourage individuals to spend more on housing via larger home purchases, and to borrow more than they would in the absence of the deduction.

Or to use the same language that the centre-right commonly uses to discredit any form of progressive tax reform, the mortgage interest deduction is distorting the housing market. The Senate Committee report spells this out: 

The mortgage interest deduction primarily benefits upper-income households. Higher-income taxpayers are more likely to itemize deductions. As with any deduction, a dollar of mortgage interest deduction is worth more the higher the taxpayer’s marginal tax rate. Higher-income households also tend to have larger mortgage interest deductions because they can afford to spend more on housing and can qualify to borrow more.

What the Senate Committee then did was to tabulate the income range of the main recipients of the mortgage interest deduction – and guess what? There wasn’t much sign of “ordinary Mums and Dads” seeking a nest egg for their retirement. Some 27.8% of those claiming the deduction were earners in the $100,000- $200,000 annual income range, and a whopping 62.8% of the people claiming the deduction were earning over $200,000, or three times the median income of US households.

This US Treasury document on mortgage interest deduction, largely backs up the Senate Committee contention that this is a policy that further enriches those least in need:

In 2018, less than 4 percent of taxpayers earning less than $50,000 will claim the deduction, and these taxpayers will receive less than 1 percent of the tax expenditure’s overall benefits. Taxpayers making over $200,000 will make up 34 percent of claims and take 60 percent of the benefits.

As Bloomberg News summarised the situation:

...It is certainly not helping the housing market, first-time home-buyers or the federal government’s fiscal health to subsidize the debt of high-income households at a steep cost. The US Treasury Department estimates the deduction — even at a reduced level with fewer claimants — will cost just under $600 billion between 2019-2028. There’s many ways that money could be re-purposed to help renters, first-time buyers, or even put toward expanding the supply of housing -- all things the deduction doesn’t help currently.

And finally:

Let’s stop calling it the mortgage interest deduction and start calling it what it is: Debt subsidy for the wealthy… Opponents need to persuade Congress to act, so that Americans can stop wasting money helping the affluent [to] borrow.

There is no reason to think this analysis does not equally apply to New Zealand.

Open banking is a banking scam

A country as small as New Zealand was never going to be a good place to unleash market forces, demonise the need for effective regulation, and still (somehow) expect competition to thrive. In reality, markets that are left un-regulated will converge. That’s what free markets do. And so… It should come as no surprise that in every sector of the New Zealand economy, neo-monopolies, duo-polies and cartels screw consumers, postpone the cost of innovation, reduce quality, and limit the labour and environmental protections… For the sole benefit of shareholders.

That’s what happened in telecommunications in the 1990s, and since then in supermarkets, banking, airlines, energy companies etc etc. Overwhelming market dominance by one player, or by a few cosily co-operating players, is the Kiwi norm. For example: Air New Zealand reportedly controls 86% of the domestic airline market. Meaning: There is nothing to stop Air New Zealand from recouping its costs (and maximising profit) by hiking up its prices, without fear of being undercut by any meaningful rival.

Only structural change – in the form of effective anti-trust actions – will break up those bogus markets and enable genuine competition to occur. That’s also the only way that any foreign new entrant would consider risking the start-up costs involved in entering the captive markets that operate in New Zealand, and which continue to strangle the hope of effective competition. Neither Labour or National though, have any appetite for taking on the supermarkets or the banks – or even for enacting windfall taxes on the profits that they effortlessly pile up.

Instead, consumers are urged to make savings by scrambling around for the crumbs that are deliberately dropped from the table from time to time, in order to keep the feast going. We’ve seen this happen with power companies, with telcos, with supermarket “loyalty cards” and now with the calls for “open banking. ” The Commerce Commission has just decried the lack of genuine competition in a personal banking sector dominated by the four Aussie-owned major banks.

In the absence of genuine competition, consumers are supposed to shuttle back and forth between their predators, thereby doing their bit to keep the illusion of competition alive.

No Banker Left Behind

Over the years, Ry Cooder has resurrected any number of buried musical gems, and this oldie originally recorded by Uncle Dave Macon (1870-1952) is as topical now as it ever was:

Here’s “Walking in Sunlight,” a personal favourite of mine among Macon’s vast repertoire:

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