Latest posts by Wanderer (see all)
- Reader Case: Keep Calm and FIRE On - May 31, 2019
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- Reader Case: Should I Buy a House as a Passive Investment? - May 17, 2019
When I asked FIRECracker about today’s article, she responded by growling and jabbing at her Chautauqua UK speech, so today I’ll be filling in for her Monday post.
As you all know, I’ve been keeping a pretty close eye on what the American politicians have been up to, not because I particularly care about US politics, but because there have been a lot of things happening that could potentially affect the FIRE community in potentially devastating ways. The most obvious one being Trump’s repeated attempts to repeal and replace Obamacare, attempts I’ve written about here, here, and here.
And while this high-profile will-they-won’t-they drama has been unfolding in the headlines, a quieter effort’s been going on underneath the surface targeting something else that for some reason hasn’t really received a lot of media coverage.
But first, a little background.
The United States (and many Western countries like Canada) have tax policies in place that encourage citizens to own real estate. Why does the government care whether you own? Well, to boost the economy of course! And to that, everyone nods and goes “well yes, that’s obviously a good thing.”
The funny thing is, if you stop and think about why a citizen owning their home rather than renting it affects the economy, it’s actually not that obvious. But leave it to none other than Bill Clinton to explain it in a way everyone can understand.
When a family buys a home, the ripple effect is enormous. It means new homeowner consumers. They need more durable goods, like washers and dryers, refrigerators and water heaters. When we boost the number of homeowners in our country, we strengthen our economy, create jobs, build up the middle class, and build better citizens.
~ Bill Clinton
Ah. Gotcha. Homeowners buy more crap. Now THAT’s a statement we here at Millennial-Revolution.com can get behind.
So governments want people to buy more houses because it encourages them to buy more stuff. And how do they do this? In Canada, we exempt all capital gains for a principal residence from tax. And for the US, they have an even bigger tax break: The Mortgage Interest Deduction.
Basically, the Mortgage Interest Deduction allows Americans to subtract any interest you pay on your loan off your total taxable income. It’s a pretty sizeable tax break, and costs the American government around $80 billion a year. So it’s HUGELY costly.
Here’s the strange thing. Both conservatives and progressives hate it.
Conservatives argue that the Mortgage Interest Deduction messes with the free market and encourages people to purchase things with debt, rather than savings, which as we’ve written before, distorts people’s perception of how much things cost. This is true.
Progressives argue that the Mortgage Interest Deduction primarily benefits wealthier people. This is also true, since people with higher-paying jobs qualify for larger mortgages, and therefore benefit more from a Mortgage Interest Deduction since, you know, their mortgages are bigger and therefore they’re paying more Mortgage Interest.
But because so many people benefit under the Mortgage Interest Deduction, touching it is akin to a political third rail. Touch it and you die. So no politician dares mess with it.
Trump administration weighs slashing mortgage deduction
Reducing the mortgage interest deduction would send earthquakes through the real estate industry.
Now, I’ll be the first to admit that I was a completely shocked to read this. And not because this is an overly right-leaning or left-leaning move, because the Mortgage Interest Deduction is somehow neither a left nor right issue. But Donald Trump, regardless of what you think of him as a politician, regardless of what you think of him as a person, I think every single one of us can agree on the statement that Donald Trump is 100% a pro-real estate guy.
I mean, the last three cities I’ve been in (Toronto, Chicago, Panama City) have all had Trump Towers in them. He is a MASSIVE fan of real estate.
Which just makes his decision to take a whack at homeowners all the more confusing.
But peeling back the layers, it’s not totally stupid.
Trump got elected for a lot of reasons, but one of them was the promise to drastically cut corporate taxes. And that’s fantastic. For the stock market, for investors, and for early retirees like us who depend on the continued performance of the S&P500, that was music to our ears.
But then he got mired in the Obamacare repeal-and-replace debacle.
Don’t get us wrong. We’re GLAD he got stuck in the mud when it came to blowing up Obamacare. For the FIRE community, Obamacare is a major pillar of support that’s needed to retire in your 30’s, and our fear was that the elimination of Obamacare would screw over a lot of readers.
But then, the Obamacare repeal effort blew up. All thanks to, and this was a HUGE surprise, Sen. John McCain.
Yeah, that guy. The guy who lost to Obama, and then, with a dramatic thumbs-down on the Senate floor, single-handedly cemented his former rival’s key domestic policy to the annals of history.
So, without the tax savings that repealing Obamacare would have given him, Trump is now forced to dig deep into constituencies that have money, and yet aren’t likely to take to the streets and start marching.
After all, when’s the last time you’ve seen a homeowner march with a sign outside of city hall? It doesn’t happen. They’re too busy working and worrying about their next mortgage payment. So I think Trump’s hoping for a free pass here. Homeowners don’t protest. They bitch and complain about tax hikes, but at the end of the day, they tend not to take to the streets and march for their interests.
But here’s the problem with that strategy. Homeowners? They tend not to march. But they do vote.
So he’s taking a pretty big gamble here, potentially pissing off a very large chunk of people in order to fund his tax cuts. That being said, his original plan to fund this tax cut was to repeal-and-replace Obamacare, which in itself would have pissed off a very large chunk of people. So in a way, I guess his new plan isn’t that different from his old plan. But instead of screwing over poor people, he’s now going to try to screw over homeowners.
It’s an interesting strategy.
And again, this is just a proposal, which is a long way off from a bill that passes through both chambers and gets signed by the President. But oddly enough, if it does go through as is, then Trump will have inadvertently passed policies that directly benefit people who read this blog, namely:
- Keep Obamacare intact. This is good for anyone who intends to retire early.
- Cut corporate taxes. This will keep the stock market rally going, which helps anyone investing in low-cost Index ETFs.
- Whacks homeowners. But who cares? As this blog writes, it’s better to rent and avoid the massive mortgage. No massive mortgage means no massive mortgage interest, which means the Mortgage Interest Deduction didn’t impact you much anyway.
So I don’t know. Maybe Trump reads this blog. God, I hope not. But if he does, this combination of policies is almost a Millennial-Revolution stimulus plan. So…thanks?
So what do you all think? Is Trump going to take a whack at the Mortgage Interest Deduction? Or is this all smoke and mirrors?
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