Econ 101

It never ceases to amaze us how economically illiterate most Americans are. To begin with, very few even understand the difference between inflation and the wage/price spiral. Worse yet, as the esteemed Neal Boortz points out, far too many people, when asked how much they paid in income tax the previous year, respond by saying "Oh, I didn't have to pay anything! I got a refund!". What's tragic is that they completely miss the point that the refund represents an over-payment of the taxes they paid.

It's also amazing how illiterate the majority of taxpayers are concerning even the most basic concepts regarding taxes. Never mind the nuances of the controversy surrounding the fact that the 16th Amendment was not properly ratified by a number of states. The concept of "tax-deductible" comes to mind. For the uninitiated, "tax-deductible" does not mean that an item is deducted from ones taxes, it means the sum is deducted from ones taxable income. Ergo, the tax burden is only reduced by the marginal tax rate applicable to the item.

Which brings up that most sacred of cows: the home mortgage deduction. It was rather distressing to be in the position of almost having to use pen and paper to prove out point to Santa, whose genius IQ certainly puts him well on the path to Mensa membership.

The illustration we used went thusly: two people of equal income, in the same tax bracket, buy houses that cost exactly the same. For the purpose of simplification, we'll assume that both earn $50k/year and are in the 25% tax bracket. One buys the house outright, the other assumes a mortgage, the first-year interest on which comes to $10k.

With Mortgage No Mortgage
Gross Income $50,000 $50,000
Mortgage Deduction 10,000 0
Taxable Income 40,000 50,000
Tax Due 10,000 12,500
Disposable Income 30,000 37,500

So, if that "tax-deductible" mortgage is so great, how come the second guy has an extra $7,500 in his pocket?

Class dismissed.


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