Re-examining the mortgage interest deduction

By Felix Salmon
November 14, 2010

One of the positive effects of the deficit commission report is the way that it has brought the stupid mortgage-interest exemption back into the spotlight. David Kocieniewski’s article in the NYT is very good, although I don’t understand why simple statements of fact have to be attributed to anonymous “experts” or “economists”:

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.

In my ideal world, Kocieniewski would also have mentioned the substantial downsides of high homeownership rates, as well as the experience of the UK, which abolished mortgage-interest tax relief in 2000, only to see house prices skyrocket afterwards.

But the broad thrust of Kocieniewski’s article is clear: the mortgage-interest deduction costs $131 billion a year, none of which goes to renters or to people who have paid off their mortgage, and all of which goes to people in the top 1/3 of the income distribution. There’s nothing fair about it at all, and in these straitened fiscal times, we’ve surely reached the point at which we have to abolish it somehow.

Given that the increased tax burden would fall disproportionately in the blue states of California, New England, and New York, you’d think that this might be something that even Republicans could get behind, but sadly I believe Kocieniewski when he says that “Congress would probably not consider it except as part of a major overhaul of the tax code.” Or, technically, when he says that tax policy experts say that Congress would probably not consider it except as part of a major overhaul of the tax code.

The problem with this kind of attribution is that it sets up a he-said-she-said equivalence between those tax policy experts, on the one hand, with people like Nancy Pelosi, on the other, who slammed the idea as a tax hike for the middle class.

In any case, I’d love to see some numbers on just what proportion of the middle class takes advantage of this deduction. And why it makes sense that $131 billion should be directed to that particular subset of the middle class, rather than to everybody on a similar income.


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I would normally be in favor of removing the mortgage interest tax deduction, except that on its totality, the deficit commission’s plan is driving me nuts. As a single person who makes around $200k, I am all in favor of removing deductions and loopholes and raising taxes to balance the budget, but this plan is a blatant transfer of wealth from the upper middle class to the truly wealthy that I have a hard time understanding. You don’t need to do the full math, all benefits being taken over from the higher income earners are fixed amounts (e.g., Social Security benefits have a cap, mortgage interest is tax deductible to a maximum of $1m, etc) while the cut in the tax rate is relative to income.

In short, this is a plan to make the taxes less progressive and cutting benefits for everyone even if more for some than others. The working class and lower middle class are hurt a little, the upper middle class pay the most and the wealthy get a bonus. I’ve never been a conspiracy theorist but this would make me rethink every positive opinion I’ve ever had of Obama.

Posted by bmozaffari | Report as abusive

Mortgage interest deduction is the QWERTY keyboard of American taxes. Proved ineffective, but impossible to get rid of.

Posted by RZ0 | Report as abusive

bmz, the truly wealthy get the majority of their income from dividends and capital gains. Raising the tax rate on those actually INCREASES the tax rate on the wealthy.

You can assign whatever tax rate to income that you like. Go ahead and tax the wealth at a 80% rate on their regular income. And guess what? You’ll find that they don’t report any regular income. They’ll convert it ALL to other forms of income that are taxed preferentially.

So ultimately you DO need to do the full math to unravel this one. The present tax system is so incredibly complex that most people don’t realize that the ultra wealthy pay proportionately less of their income to the federal government than a middle class family making $100k.

And I thought the proposal included lifting the cap on the Social Security *tax*? (Or was I dreaming that?) That would be huge, since it is a 12% tax on wage income. A 26% income tax plus 12% Social Security tax is the equivalent of a 38% income tax with no Social Security tax.

Posted by TFF | Report as abusive

My apologies, the proposal included raising the cap on Social Security taxation not eliminating it entirely. It proposes closing about half of the gap between the current cap and total wage income.

Still, any tax proposal that treats dividend and capital gains as ordinary income is a major tax increase for the wealthy.

Posted by TFF | Report as abusive

Average 2008 tax rate by income bracket (Table 8): w/250.html

Top 0.1%: 22.7%
Top 1%: 23.3%
Top 5%: 20.7%
5% to 10% 12.4%
10% to 25% 9.3%
25% to 50% 6.75%
lower 50% 2.6%

Superficially progressive, however when you add an extra 15% for Social Security and Medicare onto the wages of all but the top earners, that effectively closes the gap.

The lower 50% pay less tax than the rest. Everybody else pays 20% to 30% of their income to the federal government when you combine income taxes and social insurance taxes.

Posted by TFF | Report as abusive

To read this article, one would think that some time ago, Congress passed a tax break that for the first time granted wealthy home owners a deduction for the interest they pay on their mortgage. That is not the case; in fact, mortgage interest has always been tax deductible. Not that long ago, all interest was tax deductible. Over time, the insatiable need for more tax revenue has required taxing new things, and more and more interest paid has been added to taxable income. But the mortgage interest deduction has been too widespread, large, and visible for it to be attacked.

Personally, I’d be in favor of removing the mortgage interest deduction, but not alone. The problem with it is not that it goes disproportionately to the wealthy, but that it encourages debt. The change should be that make all interest paid part of taxable income, including for business, and remove the tax code encouragement of indebtedness.

Also, I’d like to see the worst tax expenditure on the table; the tax break for state taxes (income or sales). There is no reason for the federal government to subsidize high state taxes; all people with $200K taxable income should pay the same federal tax, whether they live in Montana or New York. If the states want to avoid double taxation, they can make federal income tax deductible on state taxes instead of the reverse.

Posted by MattJ | Report as abusive

Unfortunately, the mortgage interest tax deduction is pretty much a third-rail of American politics. We have an ideology that everyone’s aspiration should be to own a home, and any policy move that could appear contrary to that is dead on arrival.

There are only two ways to end the MITD. The easiest would be as part of a grand political compromise, though the Debt Commission’s proposal isn’t really much of a compromise. The second alternative is to slowly phase our the MITD. That could be accomplished over a lot of years. Or, we could grandfather in everyone who already has a mortgage and not let mortgages enacted after Day X count towards the deduction. The grandfather approach is the worst of the three, but it may just be the most politically convenient.


Posted by ZacharyST | Report as abusive

Zack, I would recommend a gradual phaseout of the MITD over a ten year period. This could be achieved by establishing a ceiling on the deduction which drops over time.

For any abrupt change, grandfathering is important. Repeal of the MITD will already impact housing prices (since it decreases the affordability at a given price), and a failure to grandfather would doubly punish somebody who purchased in good faith.

Posted by TFF | Report as abusive

People with nothing to lose are a tough bunch to govern. They tend to do stupid things like walk through the desert, falsify documents, work in harsh conditions for minimal pay and sadly also resort to even more extreem measures in more extreem circumstances. If I had nothing to lose I would most cirtinly do exactly the same things.

Incentives toward building wealth via 401k’s IRA’s and homeownership need to be increased not decreased.

Home ownership is not an investment… I’m not trying to have that debate all over again… but it does represent a store of value that can be tapped in retirement. For far to many it is the only source of stored value. If you are going to take that away for god sakes replace it with something else for people to lose or I fear the country will be weaker rather than stronger.

Posted by y2kurtus | Report as abusive

“Home ownership is not an investment… I’m not trying to have that debate all over again… but it does represent a store of value that can be tapped in retirement.”

Alternatively, it is a valuable asset that reduces your cash income needs in retirement. Home ownership is monetized daily, every time you wake up without owing another $50 of rent.

I still think there are better ways to encourage home ownership. A tax credit rather than a Schedule A deduction would be a start.

Posted by TFF | Report as abusive

Some great points from TFF regarding better ways to encourage home ownership through a tax credit and a gradual phaseout of the Mortgage Interest Tax Deduction.

Posted by petepost | Report as abusive