Friday, August 12, 2011

Casey B: Tax Advantage

Browsing Hayward's links, the blog name Supply and Demand (in that order) sounded interesting...
It sounds like a supply-side thing, but the wording is clever.
Anyway, I found The Misunderstood Mortgage Interest Deduction (Copyright, The New York Times Company) and found it interesting.

In that post, Casey B. Mulligan writes:
This [home-mortgage interest] deduction allows taxpayers who own a home, have a mortgage and itemize deductions to reduce their personal income tax by including home-mortgage interest payments in their tax deductions. Homeowners rightly consider this when considering whether and how much to invest in a home and how much they should borrow.

A homeowner who pays, say, one-third of his taxable income in federal and state personal income taxes will recognize that a $3,000 monthly mortgage-interest payment really only costs $2,000, because the mortgage interest reduces his taxable income by $3,000 and thus the personal income tax owed by $1,000 a month. It’s as if he paid $2,000 and the federal and state government treasuries paid the other $1,000.
It is as if the government pays part of the interest. An important concept. Make it your own. If you get a tax deduction for a dollar spent, it is as if you spent less than a dollar. You got a bargain. A discount. A rebate.
Casey talks of thousands. I talk of dollars. Oh, well.
It isn't something-for-nothing. The government makes up the difference.

An important concept. Mulligan expands on it:

Interest deductions are present in the business sector, too, and have the same essential properties as the home-mortgage interest deduction.

The "essential" property being the business pays part of the cost, and the federal and state government treasuries pay the rest. If the tax rate is 20%, the government covers 20% of the cost of what the business buys.

Source: Tax Policy Center
Yeh, that's why business spending is such a big number and business taxes make up such a small part of government revenues.

It's a gimmick to get businesses to spend money. It's a way to make the economy grow. It used to work pretty well. But things have been getting worse for a while.

"A corporation that borrows [for example] to finance an investment project can deduct its interest payments from its taxable income..."

It's true. Interest deductions (other than mortgage interest) were removed from the personal tax form between 1986 and 1990 or so. But on the business income tax form, interest costs in general remain deductible.

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