Sacred cow of mortgage tax relief needs slaughter

November 15, 2010

The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

The tax deductibility of mortgage interest is almost as inviolable a part of the American dream as is the U.S. Constitution. The co-chairs of the White House deficit commission have boldly, and rightly, put this almost century-old sacred cow on the chopping block. Now they just have to convince legislators to swing the axe. They could start by killing the myth that the subsidy is all about middle class homeownership.

For starters, the deduction disproportionately helps those who can easily afford a home anyway. According to the Urban-Brookings Tax Policy Center, the richest 20 percent of taxpayers reap 70 percent of the benefit of mortgage and property tax deductions. A married couple able to take out a $1 million loan — the current cap for the deduction — reduce their taxes by more than $15,000 a year at a 6 percent interest rate. A more typical middle-class couple with a $200,000 loan saves only a few hundred dollars more than they get anyway from an alternative standard deduction.

This example suggests that, at a minimum, the cap is currently set too high. Not only that, it encourages homebuyers to borrow as much as possible whether or not they really need to, inviting the excessive leverage that helped produce the recent financial crisis. The deduction even applies to second homes, an absurdity if the ostensible goal is to help ordinary American families own their homes — and an inducement to speculate.

The deficit commission’s leaders, Alan Simpson and Erskine Bowles, have offered a menu of ideas. One would eliminate this and other deductions completely while reducing tax rates. Another would keep the deduction in place, but cap eligible mortgages at $500,000 and exclude home equity loans and mortgages on second homes altogether.

The first option might seem politically impossible, but courageous lawmakers shouldn’t dismiss the second. It would reduce the benefit diverted to the rich. And crucially, with more than 90 percent of new U.S. houses sold this year priced under $500,000, it would minimize the further shock to an already weak housing market — one argument used by those who say that now is not the time to tinker with the deduction.

Longer term, lawmakers should go further. Other countries like the UK manage to achieve high rates of homeownership with little or no tax subsidy. The eventual goal should be to eliminate the deduction altogether.

Comments

Speak for yourself. I’m tired of hearing how good everyone has it who is able to have a nice house, car and provide for their family. I have the pleasure of paying the AMT so I can”t realize all my qualified deductations. However, my sense is, you think that is okay and I should feel good about paying more to uncle sam to bail out the entitled dead wieght Americans. The hard working upper middle class is the true sucker of today. We make too much to benefits from tax breaks and make too little not feel taxes. Perhaps you should go to the UK, wiat in line for healthcare, a job, and a score 1000sqft 3 bedroom flat with 1 bath for your family of 4 about 2 hours outside of London. That sounds great, let me know how it is working for you in 6 months. Of course, Canada is really great too!

Posted by Justtakemine | Report as abusive
 

I have a much better idea. Instead of stealing from the middle class and giving to the poor…STOP GIVING TO THE POOR. 75% of “those in need” in my home town simply don’t want to work! These people COULD WORK if they wanted to. Instead they continue to suck the system dry. Stop putting warning lables on EVERYTHING, stop the HANDOUTS and let those who CAN and WILL do something for themselves..and let nature weed out the rest. Our country can’t survive if we don’t FORCE people to do for themselves.

Posted by t-add | Report as abusive
 

Marginal propensity issues here. That lower 80% experiences that extra couple of hundred differently, and it may in fact, be what is keeping some of them in those middle-class first homes. Be careful when targeting the rich, especially when using tools like tax policy that historically come with lots of law of unintended consequences thingies. Bowles/Simpson is very attractive, but then something remarkably light in detailed analysis can do that rather well.

Posted by ARJTurgot | Report as abusive
 

I’ll agree to cut the deductibility on home equity loans and 2nd homes… (easy for me as I don’t have either)…

But for the sake of the country lets keep as many people as possible on some kind of a forced savings regimen.

How about this… morph the earned income credit into a 401k style plan with a 100% match up to $5,000 for earned income filers with AGI’s under $100,000. That would cost a fortune in goverment rev but probably not as much as the deductibility of mortgage interest.

Then you’ve got people investing in productive capital rather than housing stock that needs to be maintained.

Posted by y2kurtus | Report as abusive
 

I would be in favor of doing away with this deduction in exchange for a lower overall tax rate. This is a good article and a good idea. The less our government sets up artificial incentives the more people will get back to doing what makes economic sense and the fewer bubbles we will have. By the way, I’m almost 60 and I would give my social security benefits altogether if I could be excused from paying any more social security tax and invest that money myself.

Posted by zotdoc | Report as abusive
 

I’m not as bitter as some of the writers above but not far from it. I come from the other side of the political spectrum but I strongly agree with core point. The upper middle class has to pay for everything. In making a modest income, AMT negates all your deductions. It seems the Government wants people to make less money but be leveraged to the teeth or take your money if you not playing the game and AMT you to death! My kids can’t even get student loans and I’m always paying taxes. My unemployed neighbors have kids going to school on student loans while I am paying through the nose by playing it by the rules. I feel like a 17th European serf!! Converting to S or C corps limits your income in certain ways that you’re lucky to refi the house you live in order to improve marginal cash flow. If this is the American Dream that every wanna-be “rich” person is worried about never attaining, they can have it!! Whatever your political leanings are (Left, right or center) this is certainly not working and something needs to be done! I am now of the belief that if I have to pay high taxes, I’d like something for it, like health care and less war. I can’t tell you how many times I’ve written this letter to senators and representatives of all stripes, but no one listens to a serf!

Posted by Tumblindice | Report as abusive
 

@tumlindice who said:
“The upper middle class has to pay for everything”.

Oh really? I’m not sure what your definition of upper middle class is but read this and tell me the middle class pays for everything:

http://www.msnbc.msn.com/id/36226444/ns/ business-personal_finance

Ah yes, half of the nation pays no income taxes, how interesting.

Posted by BHOlied | Report as abusive
 

@Agnes,

I get very tired of people complaining about how the rich receive all of the rewards for tax breaks. The answer is very simple and I’m sure its understood by you, a journalist for Reuters.

The fact is the rich receive the tax breaks because they pay the taxes. Is that so hard to understand? No really, please respond after reading this:

http://www.msnbc.msn.com/id/36226444/ns/ business-personal_finance

Craziness. Your profile says you discuss Fannie and Freddie – perhaps we should focus our attention there, after all, they are two of THE BIGgest factors of the housing crisis. The government subsidized (inflated) housing and blamed the went Saul Alinski on Wall Street for the crash. Heck we force banks to loan to people based on RACE alone and we’re not going to admit fault? Please…

Posted by BHOlied | Report as abusive
 

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