Our homes, our tax deductions?

July 13, 2011

Even if you realize how indebted to our homes we’ve become, the numbers in a new report from the Joint Committee on Taxation are mindboggling: Mortgage debt at the end of 2010 reached nearly $10.1 trillion, and accounted for 88.4 percent of total household income.

That’s down slightly from the peak, in 2007, of 101.1 percent of household income, but it’s “roughly 40 percent higher than 2000, 50 percent higher than 1990, and 230 percent percent higher than 1960,” according to the report.

The upshot: Our ever-larger mortgages have ballooned total household debt, at $13.4 trillion, to 90.2 percent of gross national product, vs. 69.9 percent in 2000.

Is this a good thing? And to what extent has tax policy, which permits homeowners to take a deduction for home mortgage interest on their tax returns, impacted it? And, most important, as budget talks continue in Washington without resolution, should that deduction go the way of previous tax benefits for other forms of consumer debt?

As the JCT report retells the history, prior to 1986, most consumer debt, including auto loans and credit card debt, could be taken as itemized deductions on Americans’ tax returns. The 1986 tax reforms got rid of those deductions, reasoning that they had created a significant disincentive to saving. But the home mortgage interest deduction remained.

For as long as I can remember that popular deduction has been sacrosanct; a bipartisan proposal to get rid of it six years ago failed, and President Obama’s calls to limit it for wealthy taxpayers have yet to find agreement. But as budget discussion in Washington come to a head, with no agreement in sight, the Joint Committee on Taxation report shows how big our mortgage debt has become, the costs of maintaining that deduction, and how those tax benefits skew toward the wealthiest Americans.

The mortgage interest deduction creates incentives to buy rather than to rent by lowering the cost of capital for home ownership. Supporters of the deduction believe that this has a positive impact on the U.S. economy, by encouraging home ownership, and, therefore, helping to maintain communities that otherwise might fall into disrepair. However, according to the report, it also creates financial distortions — and such distortions could have been a factor in the housing bubble:

“Some researchers argue that this creates economic distortions; the subsidized mortgage debt may lead households to demand houses that are larger and more expensive than would be demanded in the absence of the mortgage interest deduction. In markets where the marginal buyer itemizes, this increased demand for larger and more expensive homes leads to a rise in price for these homes above what the market dictates in the absence of the deduction.”

Then, too, the home mortgage interest deduction disproportionately helps those who buy more expensive homes, those with higher loan-to-value ratios, and those who fall in higher tax brackets because they have higher incomes. A Brookings-Urban Tax Policy Center study found that the mortgage interest tax break does little to encourage the middle class and less wealthy to buy homes. And as the JCT report notes: “The largest tax expenditures accrue to those households with the highest incomes as they are more likely to own homes, are more likely to itemize deductions, face higher tax rates, and have larger mortgages.”

For example, according to the Joint Committee on Taxation, the average benefit to a middle-income taxpayer (making $50,000 to $75,000) is $1,227, while the average benefit for a high-income taxpayer (above $200,000) is $6,650. In aggregate, the total cost of the deduction is $76.7 billion, with more than two-thirds of that benefit accruing to taxpayers who earn more than $100,000. Taxpayers who earned $75,000 of less received just 18 percent of the tax benefit.

Interestingly, the United States policy on the home mortgage interest deduction differs widely from that of other countries. Of the seven countries studied in the JCT report (Australia, Canada, France, Germany, Japan, Mexico and the United Kingdom) six do not permit a home mortgage interest deduction like that in the U.S. However, three (Australia, France and the United Kingdom) offer more narrow benefits to homeowners.

Would your behavior or perception of homeownership change if there wasn’t a tax incentive? Have your say:

[poll id=”26″]


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Two people with same income buy the same priced house. Why should the one who’s saved more money for a bigger down payment pay more in taxes?

Posted by minipaws | Report as abusive

Good point, minipaws. The housing bubble is evidence that industries’ (RE/mtg/banking) & government’s encouragement home ownership with minimal down payments is wrong. But to be fair, we cannot get rid of the mortgage deduction overnight. It should be phased out gradually over 10-20 yrs to prevent a further collapse of the housing sector.

Personally, I’m looking forward to the day we can rent again. We broke even on our first home sale in 1991, lost money on our sale in 2007 and will probably lose again when we sell our current home. There are advantages to home ownership, but I don’t consider the mtg int deduction to be a significant one.

Posted by yogahelps2 | Report as abusive

Casting home ownership solely in terms of a mortgage deduction is a serious mistake, since it looks at home ownership from an investment point of view, but ignores all the other aspects of owning a home.

For most homeowners their home is not an mainly an investment, but their primary place of residence, and for many people the only place they will live for their entire lives. It provides a safe and secure place to raise their family, and (yes) financial security at the end of their lives.

Home ownership for most of the middle-class is a major source of pride in “owning a piece” of this country that they can take personal pride in. The country receives back (for a small tax deduction in the grand scheme of things) a US populace that is generally satisfied with its government, and willing to sacrifice more for that government than otherwise.

This recent phenomenon of looking at homes as an investment arose because of the “incentives” provided by the housing bubble to make a quick profit, which most people did not participate in at all. That is not what the “American Dream” of owning your own home is all about.

That point aside, the ability of the middle-class to own a home has been a major driver in the US economic expansion since WWII. Making it more difficult to own a home will simply result in a lower rate of growth in the US economy.

Only looking at the housing situation from the standpoint of getting more tax money for the government by eliminating the tax deduction is not only wrong, but EXTREMELY short-sighted.

The problem is not with homeowners, but with the mortgage banking system. Fix the system, and allow the housing market to return what it once was — the main driver of the US economy. Home ownership is a very expensive proposition, which translates into very strong consumer demand.

Instead of allowing short-sighted government interference and greed for more taxes make the decision for us, let the people in the housing market decide whether they want to commit to a 30 year mortgage or not.

Don’t try to fix a home ownership system that has worked well for many decades — one that has provided stability and growth for this country, as it was designed to do originally for veterans coming home from the war.

The ability for veterans to own a home and start a family probably helped prevent a major recession after WWII, provided support for the US economic system (and kept the US government in power), and was a major growth factor later as the system was expanded to include others.

The problems only began with the excesses of the mortgage banking system — let’s not lose sight of that fact.

Don’t fix what isn’t broken!

Posted by Gordon2352 | Report as abusive

I OWN my home, and I get NO tax deduction because I OWN my home. That being said this is only one of a thousand things that Americans don’t bother to look at other countries for advice on. We are way too arrogant to consider that others might have a better way. Take health care for instance…

Posted by possibilianP | Report as abusive

u wanna kill a dead market?

Take off the tax home deductions, right now, even just in this debt reduction package deal … then u will see what the “great depression” looks like.

Posted by robb1 | Report as abusive

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[…] is $1,227, while the average benefit for a high-income taxpayer (above $200,000) is $6,650, writes Reuters tax columnist Amy Feldman. Taxpayers who earned $75,000 or less received just 18 percent of the tax benefit, while taxpayers […]

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[…] those who itemize on their tax returns — in 2009, according to the Joint Committee on Taxation. The average benefit to a middle-income taxpayer (making $50,000 to $75,000 a year) is $1,227, while the average benefit […]

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