Taxes And Buying A Home

Who is better named to write an article on buying a house than Sarah Skidmore Sell?  According to Muck Rack, she is the national personal finance reporter for the Associated Press.  The article in our local paper, Tough Market For Buyers, isn’t listed at Muck Rack or the local paper (so they don’t get a cite).

Anyways, Sarah discusses that home supplies are down, prices are up, interest rates are up and the tax laws is less generous.  She is right about tax laws and mentions that interest deduction is now limited to the first $750,000 (down from a million) and deductions for state and local taxes are limited to $10,000.

Sidebar One: Here in flyover country it is very difficult to find a $937,500 house.  That is the price that would result in a $750,000 mortgage after a 20% down payment.  The $10,000 limitation is more likely to have an impact on us folks in the middle of the continent but unless you have a big income and a big house with big mortgage then the impact will be small or nothing.  End Sidebar One.

OK but the big difference for most folks is doubling the standard deduction from $12,000 to $24,000 for married filing jointly.  The number of folks itemizing deductions will be substantially reduced and the reduction in tax rates will reduce the impact of deductions above the standard even more.  This study by Sean Lowery from the Congressional Research Service using 2014 data shows that 30% of taxpayers itemized in 2014 and taxpayers with AGI between $100,000 and $200,000 averaged itemized deductions of $25,598.

For example, if a couple earned $150,000 and had itemized deductions of $25,600 [just above Sean’s average], under the old tax law they could reduce their taxes by $3,400 (($25,600-$12,000)) * 25%) compared to taking the standard deduction.

Sidebar Two : Yes $12,000 was the standard deduction in 2017 and $24,000 is the standard deduction in 2018 so the comparison is off by a few dollars but it rounds more easily.  End Sidebar Two.

Now with a standard deduction of $24,000 and lower tax rates the tax savings in our example would be 22% of $1,600 or $352. Almost everyone will see an overall tax reduction from the new law but the value of itemization will be substantially reduced or eliminated for many.  That is OK as simplification is a good thing.  Sarah should have commented on that change because it affects the most folks.

 

 

 

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We’re With Pat … But

Pat Toomey in the WSJ is challenging The Donald on NAFTA:

If presented with this ultimatum, I will vote “no,” urge my colleagues to do likewise, and oppose any effort by the administration to withdraw unilaterally. Pulling out of Nafta by executive fiat would be economically harmful and unconstitutional.

We agree.  We hope that Pat and the rest of the GOP Senate enforce their right of advice and consent and support free trade.

We would like it to be an easy call.  Lower tariffs (taxes on American consumers) and fewer restrictions on trade are always good.  Pat suggests:

[T]he administration can accept the advice from many members of Congress and others to modernize Nafta in ways that expand trade opportunities without curtailing American consumers’ freedom.

We entirely agree.  It is not, however, likely to come down to an easy choice like that.  The likely choice is a “new” NAFTA that expands trade freedom in some areas while restricting it in others. We need a full discussion rather than name calling to make the decision.  Compromise is not necessarily a bad thing but neither is rejecting the potential new treaty.  To get two-thirds support The Donald is going to need to be in the compromise business too.

Well Said Veronique

Veronique De Rugy takes The Donald to task over trade wars at the NRO Corner.  She starts with:

President Trump claimed in a tweet that “trade wars are good, and easy to win.” Unfortunately, the American people are about to experience firsthand how wrong the president is and how painful and hard it really is to “win” a trade war.

It is hard to win any war and even harder to come out ahead.  That’s why we try to avoid wars.  Veronique recognizes that trade wars are just a way to impoverish two or more nations:

Tariffs imposed by any government are, first and foremost, penalties on those of its own citizens who buy imports (or import-competing domestic goods). Uncle Sam’s tariffs, therefore, are penalties imposed on Americans. That’s what they are, period.

We don’t want to go review the John Roberts Obamacare arguments but we would prefer tax to penalty.  Other than that we are in full support of Veronique.  She also goes on to explain that the Chinese are likely to be better at abusing their citizens than the US which suggests the difficult of winning a futile war.  The Donald has often been right about economics but on tariffs he is dead wrong.

 

Republicans Versus Conservatives

We came down hard on The Donald for his tariff increases and rightly so.  We also said that we are happy he won in 2016 and we are even happier that his predecessor is gone.  Jonah Goldberg in his G-file tries to make it a problem with populism:

The funny thing is that this move toward protection is celebrated or condemned as a fulfillment of Trump’s “populist” agenda. I get that we label protectionism “populist” these days — though I’m old enough to remember when protectionism was a technocratic cause. But populism is supposed to mean putting the interests of “the people” first. (The problem with populism is that populists never mean all the people; they only mean their people.) And this move isn’t in the interests of most people.

It isn’t.  It is a problem with elections and Republicans in particular.  Reagan and W are the two most conservative presidents since Coolidge and he was not a free trader either.  Almost everyone remembers that W did some backsliding on tariffs:

The temporary tariffs of 8–30% were originally scheduled to remain in effect until 2005. They were imposed to give U.S. steel makers protection from what a U.S. probe determined was a detrimental surge in steel imports. More than 30 steel makers had declared bankruptcy in recent years. Steel producers had originally sought up to a 40% tariff. Canada and Mexico were exempt from the tariffs because of penalties the United States would face under the North American Free Trade Agreement (NAFTA). Additionally, some developing countries such as ArgentinaThailand, and Turkey were also exempt. The typical steel tariff at the time was usually between zero and one percent, making the 8–30% rates seem exceptionally high. These rates, though, are comparable to the standard permanent U.S. tariff rates on many kinds of clothes and shoes.

Holman W. Jenkins, jr. in the WSJ reminds us that Reagan made much more extensive choices than W:

Reagan slapped import quotas on cars, motorcycles, forklifts, memory chips, color TVs, machine tools, textiles, steel, Canadian lumber and mushrooms.

Holman argues that it didn’t matter because they were negotiated.  Perhaps.  What does matter is that Republicans backslide on tariffs because there are intense big winners and widely dispersed small losers.  Sadly, protectionism is a good political game and our most conservative presidents including Reagan have played it.  The Donald does too.  We are rightly worried about The Donald continuing to play it because he is not a conservative.  We will continue to encourage him towards free trade while reminding everyone that free trade was not supported by either presidential candidate in the 2016 general election.  Yes, it would be better if this was Mitt’s second term but that was not a choice in 2016.

 

Decisions Without Theory

We knew when we supported The Donald in the general election that we would have to take the good with the bad.  It was better than taking the bad with the worse.  The problem is that The Donald does not have any theoretical background.  He has created a majority by picking and choosing positions.  We still like our vote in the 2016 general election but we don’t like his position or recent actions on tariffs.  Since the two candidates in the general election shared little except for the same positions on tariffs we still like our vote in 2016 because of The Donald’s actions prior to increasing tariffs. Unfortunately, The Donald’s lack of theoretical background means that we get tax reform (yea!) and the opposite, protectionism (boo!).

Sidebar: Herself ran as a protectionist although her husband was willing to sign on to reductions in tariffs.  Given her dishonesty folks might have hoped that her articulated positions would not be implemented.  We see no solution to hoping that she was dishonest about tariffs.  End Sidebar.

The WSJ editorial board has a good summary:

Donald Trump made the biggest policy blunder of his Presidency Thursday by announcing that next week he’ll impose tariffs of 25% on imported steel and 10% on aluminum. This tax increase will punish American workers, invite retaliation that will harm U.S. exports, divide his political coalition at home, anger allies abroad, and undermine his tax and regulatory reforms. The Dow Jones Industrial Average fell 1.7% on the news, as investors absorbed the self-inflicted folly.

We have a few quibbles.  We don’t know that it will divide his coalition and it will help a few workers but hurt the majority so we are in agreement with the WSJ.  The Donald became a hero, and rightly so, when he reduced taxes on corporations and, to a lesser extent, on individuals.  We wish he made another choice but we are not surprised given his rhetoric.  The oddest quote came in this WSJ article:

“This is going to be effectively a tax increase,” said Brian Nick, chief investment strategist at Nuveen.  [Emphasis added]

There is no need for modifiers.  This is a tax increase.  It will help a few substantially while hurting many a little.  The problem is that The Donald has no theoretical grounding so he cuts some taxes while increasing others.  On tariffs, providing lots of protection for a few while hurting many a little might make political sense but it makes no logical sense.  Cutting corporate taxes benefitted many without hurting any particular group.

This is how it will be for the next seven years.  The Donald will do some great things and some stupid things.  It is better than the last president and better than the 2016 alternative.  We would prefer it wasn’t so but it is.  We would prefer that we had an optimal choice in 2016 but there wasn’t.  We hope he will change his mind on tariffs but we are not holding our breath that he will undo this colossal mistake.

Healthcare And Incentives

Clark Harvighurst, professor emeritus at Duke, writing at the WSJ Editorial Page has an interesting article related to health-care and taxes.  He mostly addresses it to three CEOs, Bezos, Buffett, and Dimon who he summarizes with BB&D.  We love the ampersand too Clark.  We are 100% in agreement with his point that excluding health-care benefits provided by employers from employee income is major problem with the US health-care system.  We are not convinced, however, that folks react exactly how he describes.

To be clear, when an employee receives health-care benefits paid by the employer it is valuable to the employee but it is not part of gross income as determined by the Internal Revenue Code.  Specifically:

Under IRC sections 105 and 106, employer-provided health benefits, including reimbursement and insurance, are generally excluded from the income of employees.

It is one of those weird parts of the tax law that excluded almost $22,000 in income from MWG tax return a few years ago.  We agree that BB&D would provide a major service if they pushed to treat health-care income as taxable like other income.  We are not convinced that the beneficiaries are acting as Clark says.  Here is his quote:

Because employees don’t pay taxes on employer-paid insurance premiums, most workers assume that—and behave as if—their health-care costs are borne by employers. True, most employees now pay some share of premiums directly, along with copayments and deductibles. But they still unknowingly pay far more in lower take-home pay. When working Americans say they like their health plans, it’s clear they aren’t seeing the whole cost picture.

We don’t see it that way.  It seems to us workers act as if health-care costs are not taxable while wage income is.  Thus, getting a whole dollar of health-care insurance rather than a dollar of wages that are reduced by FICA and income taxes seems rational.  We think they are knowingly taking less take-home pay.  Folks buy way too much insurance (they cover everything they can) because it is cheaper with before-tax-dollars.

Sidebar: Another problem with the current system is that a few folks are worse off under this deal.  An example is the Lady de Gloves who did not take the health-care play offered by her employer because MWG was already covered.  She got nothing while most folks got thousands of dollars worth of insurance.  End Sidebar.

It is also rational for the employer since they pay a dollar in health care instead of a dollar plus FICA.  So we see the current system as a rational reaction to the current irrational tax system.  We do agree with Clark that the current system makes many of us uninterested in that actual costs of medical care.  We entirely agree with Clark that we hope BB&D can change the tax treatment of fringe benefits.  If we can fix corporate taxes then why not this?

Priorities

Priorities are critical.  As department chair, we have lots of nodding agreements supporting this, that, and the other thing.  Chairs have a long list of goals but because of the regular demands of the office like budgeting, scheduling, and students and the difficulty of creating coalitions only a few priorities ever get addressed.

Sidebar One: We recollect it was Woodrow Wilson used his experience to compare politicians to college faculty and administrators.  We found the quote here: “As compared to the college politician, the real article seems like an amateur.”  We don’t have Woodrow’s experience but tend to agree.  End Sidebar One.

The same is true of formal politics at every level, especially the national level.  The recent State of the Union speech was criticized because it, like most of it predecessors, was a long laundry list without priorities.

Sidebar Two: Well, it seemed to us that immigration was the priority.  We think that one priority, especially immigration, is OK. End Sidebar Two.

We are interested in what to push.  We had mused about the possibility really free trade rather than the mixed results of agreements like the Trans-Pacific Partnership.  Michael Brendan Dougherty’ polemic against free trade helps us see the difficulty of such progress. To his credit he recognizes that his position on taxing assets (nonproductive property) puts off folks but then he tries to lump the free traders with him.

First, he tries to link open borders with free trade:

We should not fool ourselves that somehow some authority out there called “the market” wants no limits on the supply of labor and then open our borders in response. Doing so against the consent of the people would jeopardize the democratic character of our society and doom what’s left of the egalitarian ethic that makes democracy possible.

The Venn Diagrams of folks for free trade and open boarders do overlap, especially on the WSJ editorial page, but they are two different things.  We are in the part that doesn’t overlap.

Next, he tries this:

Governments have a right and sometimes a duty to inspect what comes into their ports, not only for security reasons but to enforce the rules of the market that entrepreneurs depend on.

This is certainly a duty and great opportunities for cronyism and graft.  A small example of cronyism is when Irish butter was banned in Wisconsin.  It is part of the argument for thousand-page agreements. The US would like other countries to limit non-tariff issues to security and market concerns.  The problem is the agreements expand into questionable areas.

[Ron] Paul [as an example of a doctrinaire libertarian] thinks that if Japan’s government subsidizes the manufacture of a car to the tune of $4,000, then American consumers should just rake in the free gift from Japanese taxpayers. I do not. I think mercantilists can erode the support for worthwhile trading arrangements in both countries at once. I similarly fear it will be deleterious to a liberal system if these nations succeed in creating monopoly pricing power for their firms.

We support the American consumers as Paul does.  Part of the reason is the accounting problem of what is a subsidy?  Another part is the difficulty of creating monopoly pricing power.

Lastly, Michael gets into a double dose of security.  First, we need military stuff and we can’t depend on other counties for it and second, the US Navy is critical to maintaining the freedom to trade.  The first part seems like a good argument to support fracking but at least some military stuff will need to be imported.  From whom seems to be the interesting question. We agree on the importance of the US Navy but fail to see any connections with tariff policy.

If conservatives are this far apart on priorities it is easy to see why political progress is hard.  It is not clear what priorities Michael has other than never Trump although he seems to be on the social and international beat.   He tried humor, we think, in Anthony Kennedy Can’t Be Allowed To Die.  Arguments matter but it will be hard to support any of Michael’s political priorities ahead of ours.  Baseball is another matter entirely.