Saturday, March 28, 2009

Taxation Deflation

President Obama's pledge to eliminate itemized deductions for the dollar weighted majority is a great example of deflation from a source not often discussed - tax policy. A quick sketch of the deflationary impact of one part of that change, the mortgage interest deduction:

Let's use Barack Obama's Chicago home as a test case.

According to reports, then-Senator Obama paid $1.65M and took a 30Y fixed $1.32M mortgage with no points at 5.94%. With other taxes and insurance, his mortgage payment was about $10,000 per month. Interest paid the first year was $78,000, which amounts to about $6,500 per month. Of that, $60K was deductible as capped by the million dollar rule. The same year, the Obama's reported an Adjusted Gross Income of of $1,655,106 (up from $207,647 the year prior--nice job) which put him in a 35% marginal tax bracket.

All that amounts to a monthly benefit of about $1,750 from the mortgage deduction, adding $290,000 in buying power. But under the President's new tax plan rates jump to 39.5%, so the lack of mortgage deduction plus the tax increase amounts to a loss of $2,000 per month, or $335,000 in buying power.

Under the new plan, his best offer would have dropped from $1.65M to $1.32M, an immediate price deflation of 20%.


  1. Personally I think is about time the upper bracket of our population starts paying their fair share of taxes. If we are to tax the poor then we ought to tax the upper wage earners also. Under our current system the rich can itemized so many things so in the end the rich pay little when compare to the poor.

  2. Again, this is a deflation in asset value, not in currency supply.

    I fail to see how this deflates currency supply.

  3. "Again, this is a deflation in asset value, not in currency supply. I fail to see how this deflates currency supply."

    Assets in general almost never change in VALUE, only in PRICE. Similar homes always trade for one another, it is very difficult if not impossible to change that, on a broad scale.

    That is how the Fed rips you off systematically, by crushing the PRICE then purchasing your fully VALUABLE assets (your MONEY) away from you, for pennies.

    PRICE is the amount of currency in circulation divided by the number of assets. So if price is falling quickly (faster than generational) and broadly, the only way that can happen is currency deflation. There is no other way.

    In the case of economy-crushing tax policies, the currency supply dwindles because people can afford to borrow less, as demonstrated above. The reason the house plummets in price, is because the bank can only print the amount they believe the borrower can pay back. Now, that is less currency for everyone.

    Broad prices are driven by the currency supply, alone.

    VALUE is what you can trade assets for in terms of other assets. In this case, Obama could chose form a variety of similar homes, but all of them would have to be priced or reduced in price to less than the currency bank could print and lend, under the more punishing tax policy, and still be reasonably certain he could launder that amount of counterfeit cash (pay them back).

    Please read:


The USA's political-economc system is best described as:

On Nov 2, 2010, I plan to vote (FOR or AGAINST) my incumbent congressman

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