Kill the mortgage deduction and give it to entrepreneurs

February 11, 2011

Prospective home buyer Jessica Doctoroff (C) visits a condominium for sale with her real estate agent Brenda Bremis in Medford, Massachusetts April 2, 2009.   REUTERS/Brian Snyder  Somehow I don’t think President Obama had the home-mortgage interest deduction in mind when he mentioned the U.S. tax code before the U.S. Chamber of Commerce this week.

Yet winding down and eliminating this write-off for homes would be good for business. It’s unfair, doing nothing to revive the housing market and can be put to better use shifting it to entrepreneurs to create jobs.

Most of the job creation in the U.S. economy comes from small businesses, which typically have no public shareholders to sate and are not primarily interested in fattening pay packages of overpaid executives.

The home mortgage deduction needs to go because it doesn’t make housing less expensive, either. If anything, it makes homes more expensive because the subsidy inflates prices. Most homebuyers don’t even itemize to take advantage of it. Nixing it would make homes more affordable.

As Alan Mallach, senior fellow at the Center for Community Progress, wrote in this space: “It is one of the most regressive parts of the tax code, since it affects all house prices, including the price of houses bought by lower-income home buyers, who rarely itemize and get little benefit from the deduction.”

Mallach cites one study found that “barely 10 percent of homeowners earning less than $30,000 take the deduction, but they pay higher prices for their homes to benefit more well-off homeowners. On top if this, it is projected to add $120 billion to the federal deficit next year.”

Will getting rid of the write-off deep-six the already flagging U.S. home market? Mallach noted that Italy pared its residential housing deduction in 1992 and maintains a higher home ownership rate than the U.S.

Why give a break to entrepreneurs? Won’t they squander it? True, many businesses won’t make it out of start-up mode, but those that become profitable become employment engines. Small and medium-sized enterprises account for 60 to 70 percent of most jobs in industrialized countries. Why not give those that are struggling to survive a tax break if they can create more employment?

According to Robert Litan of the Kauffman Foundation in Kansas City, between 1980 and 2005, nearly all U.S. net job creation was produced by small firms.

When President Obama exhorted corporations to spend the “$2 trillion sitting on their balance sheets” to bring down the 9-percent unemployment rate, he was preaching to a tone-deaf choir. Although they wanted to hear that the corporate income tax would be reduced — and that message was delivered — he should have talked about how he was going to help small and medium-sized businesses.

Big public corporations have long relied upon anti-social incentives when it comes to employment. They can fatten their bottom lines when they lay off people, cut benefits, take over other companies and sit on cash. The market often rewards them for doing so and executive stock options go up in value.

The White House should be studying what Singapore, Hong Kong and New Zealand are up to, which were rated as the three best places for the “ease of doing business” by the World Bank. And instead of talking before the mega-corporate club of the U.S. Chamber of Commerce, he should talk to some innovative entrepreneurs around the country.

A more socially responsible tax code needs to reward people for productive activity. Giving Americans a huge break to buy an overpriced home has already gotten millions into trouble. It’s the one part of the American Dream that has turned into a nightmare.


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The tax break isn’t what caused all the problems; it was fraud. That tax break has been around for decades.

According to a Reuters article I read earlier this week, more than 1/3 of the mortgages in America are still underwater. If you think real estate market is harming the economy now, what do you think those people with the underwater mortgages are going to do when you remove the last financial incentive they have for continuing to make mortgage payments?

If an entrepreneur has a great idea, it should stand on its own merit.

Posted by breezinthru | Report as abusive

You discount all of the folks who just go to work everyday pay their mortages on time and do indeed depend on that deduction. This is another idea to that smacks of “wealth redistribution” upward to the wealthy. No sale!

Posted by Maggy519 | Report as abusive

The UK ended the deduction about 20 years ago. The outrage was brief and house prices kept soaring.

Posted by RichardBaum | Report as abusive

People who understand economics, know that the tax break benefits the mortgage market, not the homeowner. If there was no tax break, which is a holdover from when all consumer interest was deductible, there would be less mortgage demand and mortgage rates would be lower. This would be net zero to the homeowner, but mortgage investors would receive a lower return. The mortgage deduction creates excess demand for housing with an empty incentive for the home buyer.

Posted by jrg | Report as abusive

If you really want to know about our inflation, you have to check outside the US for information. ichard-blackden/8317035/Americas-inflati on-alarm-is-growing-ever-louder.html

Posted by lezah2 | Report as abusive

Those who believe that there are no benefits from the home mortgage deduction don’t have a mortgage. Who benefits the most, banks of course. They still are giving customers less than 1 percent on their savings so they can lend it out, making 10 times the amount that they pay to use it. When will people learn that our government and the banking system is so corrupt, it should be replaced..quickly. And naive presidents have not a clue what’s going on. That’s why they’re so popular with the media. Geithner’s most difficult task is to keep Obama from knowing anything about finances and economics.

Posted by lezah2 | Report as abusive

This is a most illogical argument.

If most people aren’t taking the deduction, then how does a dormant tax benefit cause any material adverse effect on the economy?

Posted by stacylaw | Report as abusive

Useless suggestion. If this wasn’t Reuters, I’d think it was a paid KoolAid Party troll.

Posted by Eideard | Report as abusive

Yeah, right. Let’s take away one of the few remaining breaks the middle class (or what’s left of us) gets so we can cut another deal to help the wealthy become even wealthier.

The “American Dream”? Stick a fork in it….it’s done.

Posted by Art_In_Seattle | Report as abusive

Is there a problem with the logic in this article? “Most homebuyers don’t even itemize to take advantage of it. Nixing it would make homes more affordable.”

How could nixing something the author claims is not even used by many, thereby not impacting U.S. tax revenues, but benefitting those who do take advantage of it, make homes more affordable?

The author revealed that nixing this tax break is not about tax revenues (since he claims few take advantage of the deduction). Therefore, he’s simply gunning for the few like myself, living in modest middle class homes that are affordable because we take this deduction.

“If we don’t get rid of those few middle class stragglers leftover from the purge, the aristocracy cannot fully gain control. Get rid of that mortgage interest deduction! I don’t care if it has no real impact on tax revenues, that’s beside the point!”

Posted by DisgustedReader | Report as abusive

Take it away immediately – but only from homeowners’ additional properties. If you look at those who amass money with “buy to let” properties – those are the folks who helped to inflate the housing market by turning tricks on those who’ve never owned. If the mortgage interest for these additional properties were not deductible, I bet a lot less of them would be keeping these extra homes – and for those who can afford it, they can pay the justifiable tax. More houses on the market would likely prevent bubbles from getting so bloated, and those first time buyers wouldn’t have to pony up such massive down payments.

Posted by hyperlux | Report as abusive

The tax break is classic redistribution of income. We homeowners use the federal government’s handling of tax dollars to spare us from the interest we take on, and people who do not own homes subsidize us with their own tax dollars. I do benefit from this form of socialism, for that is what it is, but I could also live without it. I think it’s an idea whose time has ended.

Posted by RynoM | Report as abusive

Um ok, let’s take a tax deduction away from people who do use it and give it to someone who might use it, if they try and start a small business and don’t go broke before they file their return, in which case they won’t need the deduction because they did not make any money.

That is brilliant!

Posted by gmroder | Report as abusive

The mortgage deduction has absolutely nothing to do with the cost of a home. It does not affect the price at all, though “Mallach cites one study found that barely 10 percent of homeowners earning less than $30,000 take the deduction, but they pay higher prices for their homes to benefit more well-off homeowners.” Utter garbage. What columist relies on the comments of one unamed study to write a story for a political motivated orginisation that no one has ever heard of? Trying to acheive a political outcome with fiscal policy is what brought the market to its knees in the first place. Funny also how this has become a zero sum game if entrepreneurs need a deduction give it to them.

Posted by The0Larch | Report as abusive

Taking away this deduction could have huge unintended economic consequences. It would negatively effect many sole proprietor business owners who make up 80% of the 20 million small business in America.

Many sole proprietors count on the mortgage deduction to expense their business equipment and expenses along with their mortgage interest. Without this deduction many would lose their ability to invest in their business and the ability to afford their mortgage.

This is one of the few tax advantages available to true small business owners and one that stimulates economic development among middle class entrepreneurs. Getting rid of it would only further harm our economy!

Posted by johnnyjr | Report as abusive

The real purpose of the deduction is to inflate real estate commissions. Without the deduction, housing prices would adjust so that overall, the after-tax price remained constant. But real estate commissions are based on the pre-tax price, so they’d decline.

@disgustedreader: The revenue raised from repeal would go a long way to balancing the budget. Why should other taxpayers subsidize you and your house? Answer: they should not.

@johnnyjr: Assuming what you say about the deduction funding start-ups, you must admit that it discriminates against renters who wish to start their own business. They don’t get to deduct their rent to free up funds, so why should they subsidize those who own their own home?

Further, this discriminates against who choose not to mortgage their family’s housing to start a business.

Posted by Gaius_Baltar | Report as abusive

My intention is that the shifting of the break to entrepreneurs would be linked to creating jobs. It wouldn’t be a handout. The fundamental question here is: Will people buy homes without the tax break? I think so. Look at all of the items that have no tax advantage — cars, appliances, etc. As for people who own homes now, as I’ve noted in an earlier column, a tax credit should be considered. You don’t have to itemize to receive it. A good point was made about renters. That’s something worth studying. And for the record, I’m for a progressive tax system and was against extending the Bush-era tax cuts.

Posted by johnwasik | Report as abusive

sure Italy has greater ownership rate with no mortgage interest deduction, but they have a nominal if non existent property tax. If u take off the mortgage deduction u will reset the home prices lower instantly. From there well, perhaps an healthier market, but, in any case, the lesson has been thought already, we do not need more beating now with prices still going down and more looming foreclosures.

Posted by robb1 | Report as abusive

to add more, the small business does not need more debts, it needs a more favorable environment to survive and compete on a global level and with Asian cheap labor. And tax wise how we compete with countries like Singapore where corporate tax rates are way less? This has nothing to do with home mortgage deductions.

Posted by robb1 | Report as abusive

[…] home ownership is higher. Critics, including many economists and tax wonks, argue that it’s complex, inefficient and unfair. It gives the biggest tax breaks to the highest earners who borrow the most money to buy the most […]

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