Posted on 03/28/2014 7:03:46 AM PDT by SeekAndFind
In the coming weeks, Americans will spend an average of 13 hours and $210 to prepare their federal taxes. Beyond the compliance burden the federal tax code imposes, it also distorts economic activity and discriminates against some taxpayers in favor of others. But one of its most egregiously unfair provisions is also among its most popular - the mortgage interest deduction.
In theory, the mortgage interest deduction is supposed to encourage home ownership, a questionable goal for government to begin with. The purpose of taxes is to raise money to finance government services, not to manipulate human behavior or economic activity.
When lawmakers tell taxpayers that they can keep more of their money – but only if they spend that money the way politicians want – it’s just as much an exertion of government power as a spending program.
Allowing individuals to deduct mortgage interest payments drives up taxes on other Americans given the need to recoup the lost revenue, or, alternatively, adds to the deficit. The mortgage interest deduction itself drains $100 billion annually from the U.S. Treasury. When other tax policies meant to encourage home ownership are added - including the deductibility of state and local property taxes and the exemption of capital gains taxes from selling a home - that number rises to $175 billion.
But even if one were to accept that boosting home ownership is a worthy goal for government, the interest deduction and accompanying tax benefits for homeowners should be seen as a miserable failure. That's the conclusion of economists Andrew Hanson, Ike Brannon, and Zackary Hawley in a study prepared for the R Street Institute, a right-of-center think tank, and published in National Affairs.
The authors took a detailed look at the distribution of existing tax benefits for home ownership and found that the benefits do more to help wealthier Americans purchase larger homes than they do to encourage lower-income Americans who otherwise would be renting to purchase homes in the first place.
The study found that in Atlanta, Denver, Detroit, Minneapolis, Philadelphia, Phoenix, Seattle and Washington, D.C., 80 percent of taxpayers earning more than $100,000 claimed the deduction, compared with just 25 percent of those earning less.
In monetary terms, the deduction is also significantly more valuable for higher-income households.
The deduction applies to mortgage debt of up to $1 million and debt from second homes can count toward that amount. Furthermore, because high-income earners are taxed at a higher rate, each dollar of earnings they get to deduct from their taxes is worth more.
A family with a household income of $500,000 with $1 million in mortgage debt being financed at 4 percent would generate $16,000 per year in tax savings, according to the authors’ calculations. In contrast, a household earning near the national median income of $51,000 with a home worth $221,000 (the median price), would receive tax savings of one-tenth that amount.
There are several leading objections to scrapping the mortgage interest deduction. One is that it would drive down home prices. Another is that American homeowners already purchased homes and did tax planning on the assumption that the tax benefit would be in place.
As to the first argument, while it’s true that limiting or eliminating the deduction would reduce the artificially inflated value of homes, that would be true of homes everywhere. That means homes would be cheaper for people shopping for new homes, as well as those hoping to sell their current homes and purchase new ones.
Also, proposals to reform the mortgage interest deduction can be designed to phase in the changes over time, so that homeowners can gradually adjust.
Recently, House Ways and Means Chairman Rep. David Camp, R-Mich., offered a comprehensive tax reform proposal that would allow individuals with existing mortgages to keep the deduction as is, while gradually reducing the cap to $500,000 for new mortgages. Another idea proposed by the authors is to change the deduction to a flat rate tax credit, to “limit the subsidy provided to upper-income taxpayers while simultaneously expanding it at the lower end of the income distribution.”
My preferred approach would be to slowly phase it out over time as part of a broader tax reform that lowered tax rates for everybody.
But there are more unfair taxes than others.
The mortgage deduction should be phased out, say, on a five-year schedule.
The problem is who gets to decide what is “fair” and “unfair.” I would trade all the “deductions” for abolition of withholding.
Yes and no. You have to pay to live somewhere. People know how much they can afford versus renting based on that tax deduction. Several of my kids bought their first homes with a monthly payment identical to their rent payments. After the tax deductions for property taxes and mortgage interest, owning the home was actually cheaper.
By the way, I completely support a flat tax and would love to see the mortgage deduction taken away. As an added bonus, it'd hit the limosine libs hard. ;)
ping
Getting rid of ‘just’ the mortgage interest deduction would screw the middle class taxpayers.
It is often their biggest itemized deduction, and when coupled with state and local taxes, chartable contributions, tools and uniforms for work, etc is the only way they can file long form. Without it they’re screwed.
Much better to eliminate all deductions and go with a flat tax.
Of all the problems with the tax code, the mortgage interest deduction is dead last in what needs to be changed. That and a health insurance deduction for individuals should be the only deductions available. Also charitable dedications.
My thoughts mirror yours. It has been such a long slog for the past 6 years with having a ‘target’ on our backs for being responsible!
I have a compromise; take my home interest deduction IF they also take that pitiful child credit allowed to illegals who claim 8 thousand kids! Deal?!
A flat tax is a fair tax, and everyone being taxed has a franchise on tax policy at that point.
Right now, the takers vote themselves more stuff that the makers have to pay for. This creates more takers, which gives them an enhanced ability to pass more votes.
The canoe then tips.
I’m for eliminating ALL deductions, just as soon as someone says, “Pay 10 percent of everything - that’s it - and everyone has to do it, 8 to 80, lame, cripple, or crazy”
Even the Russians figured this one out.
Hell, I aspire to serfdom. That was 25%. I’m paying an aggregate of 54% now across all entities, not including utilities and special tax districts.
The tax code subsidizes debt and taxes profit. Can anyone offer a cogent argument in favor of this?
Eliminating withholding would stab the beast in the heart.
I'd like a Ferrari with the Swedish soccer team as seat covers - that's about as likely.
No one wants to do away with the earned income tax credit?
Now that my house is finally paid off, I’m ALL FOR scrapping that loophole in the tax code.
I am SICK AND TIRED of having to subsidize the debts of people that are so IRRESPONSIBLE that they borrow money to buy things, rather than saving up for them.
Also do away with tax advantage of employer based health insurance.
Yeah, tax changes are great unless they affect YOU.
Take away my mortgage deduction, and go to a flat tax from the first dollar, no matter its source.
10% from a poor person, is an equivalent proportion as it is from a rich person. I do not understand why folks dont think it hurts as much—especially when it comes with less government support.
Or, we could just abolish the entire system and go back to tariffs.
If you buy something, anything, you are "out" the amount you spend?
True, but you also own the thing you purchased. So the seller is also "out" of something.
Funny how people have been doing this for thousands of years an no one realized until now that free trade was a bad thing for both parties.
OK, so professionals will just form a corporation, have it buy a house, and rent it to themselves. All mortgage interest, maintenance, etc will be business expenses.
And the corporation breaks even as the rent income offsets the mortgage and other expenses.
It should be repealed, with a long phase out that does not disrupt markets. Perhaps a declining amount that’s deductible each year, with a 15 year transition to zero.
I know a lot of people file a schedule A, especially if you live in a high State income tax State.
You’re up.
WRONG ASSUMPTION! This assumes that government spending is fixed and necessary. The alternative is to REDUCE SPENDING. Cut the turd in the white house's vacations by 50% and save $250,000,000
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