Posted on 06/18/2012 9:48:44 AM PDT by Shout Bits
Shout Bits has argued that the Mortgage Interest Deduction is not so helpful to regular Americans, but with interest rates at historic lows, now is the time to eliminate this market distortion. Not only does the MID encourage buying unaffordable homes and promote market bubbles, the primary beneficiaries are wealthy individuals as large banks. Eliminating this deduction would actually help most ordinary homeowners.
For 2012, a couple filing jointly can claim an $11,900 standard deduction, even if they have no otherwise deductible expenses like mortgage interest. Therefore, the first $11,900 in mortgage interest paid by such a couple generates no tax savings for them. Today's national average 30 year fixed mortgage coupon rate is 3.8%, which means that a mortgage smaller than $313k (11900/.038) generates no tax savings for a couple filing jointly. Now, a $300k mortgage is not unheard of, but it is clearly not for the struggling working class.
Since the first $313k of a mortgage balance is not deductible, the tax incentive is to borrow as much as possible. After all, Uncle Sam is kicking in about a third of the interest expense above $11,900. Further, the tax code discourages paying down mortgage balances, since as interest payments fall, so does that tax benefit. This perverse incentive leads to speculative bubbles which burst when incomes fall below the point where an income tax deduction is available. The MID certainly contributed to the real estate crash of 2008.
Worse still, a recent study by Andrew Hanson at Georgia State University concludes that the tax code's reach into the mortgage market increases mortgage rates for modest homeowners. Mortgage lenders siphon off 9 to 17% of the government's subsidy intended for homeowners (as much as $1.7bln per year) in the form of higher rates. Not only does the MID not benefit smaller borrowers at all, according to Prof. Hanson's study, it costs them hundreds of dollars extra, even if they cannot take an interest deduction.
It is always wrong, corrupt, and perverting for the government to manipulate markets as it does with the MID, but now is the perfect storm of minimal benefits and maximum harm. Mortgage rates cannot fall much further due to structural cost limits, so the interest deduction benefit is nearly as small as it ever can be. Likewise, with tighter lending criteria, only the well-off can qualify for loans big enough to earn an interest deduction above $11,900.
With the Federal Government looking for ways to raise taxes, the very worst choice would be raise marginal rates. Instead, a flatter and broader based tax code is the answer that is more just and stable. Eliminating a deduction that only benefits the well-off, while harming modest borrowers and enriching big banks, is an obvious choice. The time is now.
Shout Bits is available on Facebook: http://www.facebook.com/#!/ShoutBits
“The author makes a good argument for eliminating the mortgage interest deduction.”
Not really, he makes a good argument on cutting the knees out of the housing market.
Why do you think a tax increase is a good thing?
Tell ya what.
Eliminate property taxes so that we can truly own our homes and land, instead of paying rent on them to the government, and we’ll talk about getting rid of the mortgage deduction.
Until think go ‘way.
All:
Yes, of course cutting spending is the largest challenge. The big three (military, Medicaid, and Social Security) cannot continue uncut without bankrupting the USA. The math is obvious.
I personally think a low flat tax like the one Steve Forbes proposed is the best answer to the necessary evil of taxation.
The article is targeted to one of hundreds of deductions that must be eliminated to get to that goal.
Here's what I think ~ the federal personal income tax, which is only one of many taxes, was sold to the people of this country by Progressive Republicans under the stipulation that it would never apply to any but the top 1% or 2% of wage earners.
Today it's ripping off 53% of wage earners.
That proves it is a fraud, and a failure.
Best to abolish the federal personal income tax as just another failed federal program that's long outlived its utility.
If you abolish SS and Medicaid you would, of course, need to refund about $6 trillion to the people you took it from and which is as yet unspent. You can't just take that money and build highways and resthomes for illegal alien workers. You need to give it back. That'll run the national debt up over $21 Trillion.
Now, DOD, and this won't be popular ~ but DOD can exact tribute from client states. That's how it was done in the good old days. No reason we can't revise that custom.
Eliminating the mortgage deduction will absolutely crush the remaining breath out of US real estate. There are a huge amount of people that are paying their mortgages now, are not upside down but do not have enough equity to refinance at market levels today, would simply walk away from their home if they lose the tax deduction. I know I would.
The answer is to do away with the income tax all together. It’s not the Govt’s business how much I make, what I pay for mortgage interest, how many kids I have, what I give to charity, if I am married etc, etc, etc...
The income tax has always been a scheme for Politicians to get into your personal business and then try and control your choices.
The borrower isn’t paying income tax on the transaction. The mortgage interest deduction is to allow the borrower to exclude from income tax money that is paid out as mortgage interest.
All other interest payments are with after-tax dollars, except if you borrow money for investment, in which case you can deduct the cost of borrowing from the gains of the investment.
When you buy a loaf of bread, the store pays tax on the profit, but you don’t get to deduct the cost of the bread from your taxes.
We should elimate all income tax deductions and charges for interest. No deductions for mortgage, no payments for interest received.
Of course, then the government couldn’t get favorable borrowing by giving tax exemption for their interest payments.
Why should only the rich get to write off that stuff.
You got that right it would be an economic disaster. People just scraping by would walk away from their mortgage and rightly so since the rules of the game get changed in mid stream. If they wanted to spark an insurrection in this country that would be a good way to do it.
Spending must be cut first or no tax scheme will ever be enough.
The flat tax folks need to beat the drum for spending cuts before deduction cuts.
The fact of the matter is the money has already been spent. You can't "give it back". It is gone. Whatever money there is in the future will be earned by future private sector workers and investors.
Right on the mark. In my case, I'm paying HIGHER property taxes than my mortgage!
shout bits, what's your opinion?
No reason to get a federal subsidy for living in a high tax blue state/city.
This would also put more pressure on the high tax governments.
“The net result would be to continue forcing the price of houses down to their actual value. “
Actual value is what someone wants to pay. Increasing taxes to discourage home ownership is nothing but market manipulation.
Why do you want to depress home values further?
This article does not seem that well thought out.
If you think what we are experiencing is a real estate collapse just wait and see what happens if interest deductiblity is removed.
Eliminate the unconstitutional departments of Education, Homeland inSecurity, energy, labor, health and human services, communist arts and propaganda, ATF, HUD, etc. and then we will talk about screwing the middle class out of their only tax deduction.
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