17 November 2010

Eliminate tax deduction for mortgage interest ??

By proposing to curtail the tax deduction for mortgage interest, the president’s deficit commission is sounding an alarm.

The home mortgage deduction is one of the most widely used and expensive tax subsidies. More than 35 million Americans claim it, and the federal government estimates it will cost the Treasury $131 billion in forgone revenue in 2012. Its size, popularity and link to the emotionally charged American notion of homeownership has made it so politically sacrosanct that there are serious doubts whether Congress will even entertain the idea.

But by raising the specter of ending one of the most cherished tax breaks, the commission is trying to jar the public into recognizing the magnitude of the nation’s budget deficit and some of the drastic steps that might be needed to close it...

The commission chairmen also offered the option of capping the deduction at $500,000 on mortgages, rather than the current limit of $1 million. The prospect brought an angry outcry. House Speaker Nancy Pelosi blasted the commission’s suggestions, saying it would force middle-class homeowners to subsidize tax breaks for the wealthy...

Tax policy experts say that for all its popularity, the value of the deduction in public policy is debatable. It was intended to encourage homeownership, but housing economists point out that countries like Canada and Australia, which do not allow mortgage interest deductions, have homeownership rates similar to those of the United States...

Critics of the subsidy also argue that, despite its broad support, the benefits from the mortgage interest deduction flow disproportionately to the wealthy.  Calvin Johnson, a tax professor at the University of Texas, said that only those in the top third of wage earners even itemized their deductions, meaning that two-thirds of taxpayers weren’t eligible for the break...

The rhetoric of tax-cutting so dominates the political debate in Washington that many elected officials are reluctant to acknowledge that the federal government devotes as about as much money to tax breaks — $1.1. trillion — as it does to discretionary spending
More at the New York Times.  I find it interesting that a proposal to cap mortgage deductions at home values of $500,000 is described as a burden on the "middle-class."

5 comments:

  1. The article is a little misleading about the limit. The current and proposed limits are interest accrued on $1M and $500K of home acquisition debt NOT $1M and $500K of interest.

    While I wholeheartedly agree with repealing this awful and market distorting deduction, I do admit that even reducing the limit to $500K mortgages would affect quite a few middle class families. You don't have to look to far on either coast to find middle class families paying mortgages over $500K.

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  2. Bret, I've changed my part of the text to avoid misleading anyone.

    Here in the heartland, a $500,000 mortgage would probably get you into a suburban "doctor ghetto" neighborhood. I know homes are more expensive in the coastal regions, but I'm not sure it's the "middle class" who live in them.

    As the article notes, nationwide only 1/3 of taxpayers have incomes that allow them to itemize and deduct their mortgage interest. The other 2/3 use the standard deduction

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  3. Looking back on it, the article is not as misleading as it is just unclear, and, for the record, I was criticizing the original article not your presentation of it.

    Again, I support the elimination of this deduction. It makes no sense to me that two families can have equal incomes and equal house payments (one mortgage and one rent), but one can be severely punished (the renter). I would prefer rent to be tax deductible, but that's not going to happen. Regardless, the deduction is a major distortion of both the housing and employment markets as well as wildly regressive. It needs to end.

    With that said, although I'm aware that California is a bubble, I really think a label like "middle class" should take cost of living into account. I know plenty of dual-income, twenty-something Californians struggling to make house payments where the mortgage debt is over $500k. They're definitely white collar, but I'd still classify them as middle class.

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  4. In Canada, although we don't have a deduction for mortgage interest, we aren't taxed for capital gains on the sale of one's primary residence.

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  5. If it's Pelosi's comment you are referring to, I think you're missing what she meant. What she said that eliminating that deduction would take a tax break for the middle class, and not take anything away from the wealthy. So the middle class would be subsidizing cuts for the wealthy.

    It's not clear if she was referring to the elimination of it altogether, or if it was the cap @500K.

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