Skip to comments.Eliminate the Mortgage Interest Deduction Now
Posted on 06/18/2012 9:48:44 AM PDT by Shout Bits
Shout Bits has argued that the Mortgage Interest Deduction is not so helpful to regular Americans, but with interest rates at historic lows, now is the time to eliminate this market distortion. Not only does the MID encourage buying unaffordable homes and promote market bubbles, the primary beneficiaries are wealthy individuals as large banks. Eliminating this deduction would actually help most ordinary homeowners.
For 2012, a couple filing jointly can claim an $11,900 standard deduction, even if they have no otherwise deductible expenses like mortgage interest. Therefore, the first $11,900 in mortgage interest paid by such a couple generates no tax savings for them. Today's national average 30 year fixed mortgage coupon rate is 3.8%, which means that a mortgage smaller than $313k (11900/.038) generates no tax savings for a couple filing jointly. Now, a $300k mortgage is not unheard of, but it is clearly not for the struggling working class.
Since the first $313k of a mortgage balance is not deductible, the tax incentive is to borrow as much as possible. After all, Uncle Sam is kicking in about a third of the interest expense above $11,900. Further, the tax code discourages paying down mortgage balances, since as interest payments fall, so does that tax benefit. This perverse incentive leads to speculative bubbles which burst when incomes fall below the point where an income tax deduction is available. The MID certainly contributed to the real estate crash of 2008.
Worse still, a recent study by Andrew Hanson at Georgia State University concludes that the tax code's reach into the mortgage market increases mortgage rates for modest homeowners. Mortgage lenders siphon off 9 to 17% of the government's subsidy intended for homeowners (as much as $1.7bln per year) in the form of higher rates. Not only does the MID not benefit smaller borrowers at all, according to Prof. Hanson's study, it costs them hundreds of dollars extra, even if they cannot take an interest deduction.
It is always wrong, corrupt, and perverting for the government to manipulate markets as it does with the MID, but now is the perfect storm of minimal benefits and maximum harm. Mortgage rates cannot fall much further due to structural cost limits, so the interest deduction benefit is nearly as small as it ever can be. Likewise, with tighter lending criteria, only the well-off can qualify for loans big enough to earn an interest deduction above $11,900.
With the Federal Government looking for ways to raise taxes, the very worst choice would be raise marginal rates. Instead, a flatter and broader based tax code is the answer that is more just and stable. Eliminating a deduction that only benefits the well-off, while harming modest borrowers and enriching big banks, is an obvious choice. The time is now.
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The net result is to pump up the price of houses.
how about reducing spending?
I know its a radical thought
The mortgage interest rates in the USA should be RAISED. There is no incentive to deposit money into a savings account or a CD. Funds would flow into banks like a busted dike if banks earned more on mortgages and could pay a decent return on savings.
Now, as long as the central socialist government’s income tax is such an outrage all deductions have to remain until the unwieldly mess of tax law is overhauled!
Might as well eliminate the Standard Deduction too.
Mortgage interest paid to the note holder is income. It is taxed. It is not as if that money goes untaxed.
I don’t think the mortgagor should also pay income tax on the transaction.
This would result in me having $5,000 LESS to spend on products and services that REALLY impact the economy.
The Feds would only use this $5,000 to by more votes.
If you believe this money would be used to either reduce the deficit or produce something useful, you are just another useful idiot, with no concept of this adminstration’s behavior to date.
Install a flat tax of around 3% across the board, everyone pays 3% on every dollar, no deductions, period.
Adjust the size of government to to fit the revenue.
Note, if current mortgage rates are 3% or so, all that means is if you can find the money to borrow, and you qualify for it, you can get a mortgage at that rate. If there's no money to borrow, you can't, and if you don't qualify, you have to pay a higher rate.
The article is, of course, a piece of propaganda since it starts off with a half truth about mortgage rates, and proceeds to rearrange the universe in that light.
The effect it would have on homeowners would be the same as a massive tax increase.
Without COMPREHENSIVE tax reform, this is an idiotic idea.
Replace the income tax with a flat tax EVERYONE pays amounting to 8 percent of all income, no matter where it comes from, and you have a deal.
No more free riders. Everyone needs to have a stake in tax policy. With over 50 percent not paying taxes (you need to crank in the illegals), there’s no incentive to oppose tax increases on the producers.
Mortgage Interest Deduction for homeowners puts them at more equal footing of landlords who get a similar deduction as a business expense.
Ending it would only cause more home foreclosures.
>>Mortgage interest paid to the note holder is income. It is taxed. It is not as if that money goes untaxed.<<
You could say the same for car loans, unsecured loans, lines of credit and any loan that makes interest (pretty much all business loans).
No, the interest deduction was there to influence behavior: in this case to buy homes.
The underlying question is: should tax laws influence behavior or fund our government? It is more the former than the latter now.
Me? It would not affect me, since I have a 3.25% Mortgage. I don’t have a dog in this fight and am open to looking at the broader implications.
Before subtractions my total deductions were 19k including mortgage interest. After subtractions this went down by 11k. The author is lying, obscuring the truth or hiding something.
Pretty much sums it up.
No further comment needed.
How about both?
The author makes a good argument for eliminating the mortgage interest deduction.
Why are you trying to change the subject?
The net result would be to continue forcing the price of houses down to their actual value.
We have had lots of inflation over the past decades, it was simply disguised as a rise in housing prices due to the abandonment of sound mortgage underwriting principles.
The mortgage deduction just adds to it.
Set your sites higher.
Eliminate the Income Tax.
Why should government be in the business of inflating real estate prices?
“The author makes a good argument for eliminating the mortgage interest deduction.”
Not really, he makes a good argument on cutting the knees out of the housing market.
Why do you think a tax increase is a good thing?
Tell ya what.
Eliminate property taxes so that we can truly own our homes and land, instead of paying rent on them to the government, and we’ll talk about getting rid of the mortgage deduction.
Until think go ‘way.
Yes, of course cutting spending is the largest challenge. The big three (military, Medicaid, and Social Security) cannot continue uncut without bankrupting the USA. The math is obvious.
I personally think a low flat tax like the one Steve Forbes proposed is the best answer to the necessary evil of taxation.
The article is targeted to one of hundreds of deductions that must be eliminated to get to that goal.
Here's what I think ~ the federal personal income tax, which is only one of many taxes, was sold to the people of this country by Progressive Republicans under the stipulation that it would never apply to any but the top 1% or 2% of wage earners.
Today it's ripping off 53% of wage earners.
That proves it is a fraud, and a failure.
Best to abolish the federal personal income tax as just another failed federal program that's long outlived its utility.
If you abolish SS and Medicaid you would, of course, need to refund about $6 trillion to the people you took it from and which is as yet unspent. You can't just take that money and build highways and resthomes for illegal alien workers. You need to give it back. That'll run the national debt up over $21 Trillion.
Now, DOD, and this won't be popular ~ but DOD can exact tribute from client states. That's how it was done in the good old days. No reason we can't revise that custom.
Eliminating the mortgage deduction will absolutely crush the remaining breath out of US real estate. There are a huge amount of people that are paying their mortgages now, are not upside down but do not have enough equity to refinance at market levels today, would simply walk away from their home if they lose the tax deduction. I know I would.
The answer is to do away with the income tax all together. It’s not the Govt’s business how much I make, what I pay for mortgage interest, how many kids I have, what I give to charity, if I am married etc, etc, etc...
The income tax has always been a scheme for Politicians to get into your personal business and then try and control your choices.
The borrower isn’t paying income tax on the transaction. The mortgage interest deduction is to allow the borrower to exclude from income tax money that is paid out as mortgage interest.
All other interest payments are with after-tax dollars, except if you borrow money for investment, in which case you can deduct the cost of borrowing from the gains of the investment.
When you buy a loaf of bread, the store pays tax on the profit, but you don’t get to deduct the cost of the bread from your taxes.
We should elimate all income tax deductions and charges for interest. No deductions for mortgage, no payments for interest received.
Of course, then the government couldn’t get favorable borrowing by giving tax exemption for their interest payments.
Why should only the rich get to write off that stuff.
You got that right it would be an economic disaster. People just scraping by would walk away from their mortgage and rightly so since the rules of the game get changed in mid stream. If they wanted to spark an insurrection in this country that would be a good way to do it.
Spending must be cut first or no tax scheme will ever be enough.
The flat tax folks need to beat the drum for spending cuts before deduction cuts.
The fact of the matter is the money has already been spent. You can't "give it back". It is gone. Whatever money there is in the future will be earned by future private sector workers and investors.
Right on the mark. In my case, I'm paying HIGHER property taxes than my mortgage!
shout bits, what's your opinion?
No reason to get a federal subsidy for living in a high tax blue state/city.
This would also put more pressure on the high tax governments.
“The net result would be to continue forcing the price of houses down to their actual value. “
Actual value is what someone wants to pay. Increasing taxes to discourage home ownership is nothing but market manipulation.
Why do you want to depress home values further?
This article does not seem that well thought out.
If you think what we are experiencing is a real estate collapse just wait and see what happens if interest deductiblity is removed.
Eliminate the unconstitutional departments of Education, Homeland inSecurity, energy, labor, health and human services, communist arts and propaganda, ATF, HUD, etc. and then we will talk about screwing the middle class out of their only tax deduction.
The government borrowed it and then took it out and spent it on prostitutes in Columbia (for one thing), and various other things ~ but it was a dedicated tax and the initial obligations remain ~ it must be spent on payments, or it must be refunded. You simply cannot write it off the books ~ or else!
How would you force banks to lend money to people at 3.5%?
SHouldn’t we let private lenders and private borrowers decide for themselves what the value is of the money they are lending and borrowing, without government interference?
IF we eliminated the mortgage interest deduction, the cost of houses would come down, and poorer people would be able to afford houses.
The mortgage interest deduction drives up the price of houses, and only helps rich people, because poor people can’t really get any benefit from the interest deduction (either as the article says they are doing standard deduction, or their marginal tax rate is only 15% anyway).
Rich people have large mortgages, and are in a high marginal bracket, so they benefit more. Because this is a targeted tax item, essentially government is paying rich people to help them buy houses.
But logic dictates that government subsidies don’t help the people receiving the subsidies, when targeted. People have an idea of what something is worth. They are willing to pay that much. Let’s say that, for a particular house, someone is willing to part with $300,000 of their own money. Or, looked at another way, they can afford $3000 per month for that house.
Now, government says they will throw in another $500 a month in mortgage interest deductions. (I’m making up all the numbers, so they don’t work out based on percentages or anything).
Will the people buy the same house, and pocket the $500? No, they will still be willing to pay $3000 a month, but now they can spend $3500 a month. And since they are competing for houses with others, the bid price on the houses will go up to that $3500. So all the government did was drive up the cost of the house.
But poor people don’t GET $500 a month from the government to buy a house, because they don’t pay income taxes. So even if they scraped together enough money to pay $3000 a month for the house, they couldn’t outbid the rich people who get the $500 government subsidy.
As conservatives, I believe we should push to eliminate all targeted tax deductions, in exchange for across-the-board tax rate reductions. We are so excited about cutting taxes that we support targeted deductions and credits, which really are just government spending used to force people to do what government wants them to do.
Like Obamacare — where the government could have avoided the unconstitutional mandate if they had just made it a tax credit — give everybody $5000 a year if they buy insurance; it’s like a $5000 fine for NOT buying insurance. That’s what happens when you let government give out targeted credits, like for higher education, or electric cars, or mortgage interest.
Income tax rates are already set to explode next year, as well as taxes on capital gains and dividends. My family's taxes are due to go up by over $4,000, and no, Congress will not do a damned thing about it. Eliminating mortgage deductibility would cost us another $1,500+. At that point, I'll consider another country with lower tax rates, of which there will soon be many.
What I think is a good thing is getting the government out of the business of deciding what people should buy with their own money.
If you think that was real, you deserve to upside-down.
You just want to go back to the stupidity, as long as you make some money on it.
But not to worry. The hyperinflation you want so badly is just around the corner.
Sure, it would pave the way for govt ownership of all property.
Both taxing or not taxing something are a means of control.
It should be clear that when 50% pay no federal income taxes it is almost impossible to stop higher taxes.
There will never be smaller government as long as there is a huge constituency which believes tax policy is used and should be used to punish those with more than it.
Your thinking on this is missing a critical element.
Rents go up on the poor and everybody else.
Until Obama showed up you could rent an apartment in Fairfax County ~ 2 bedroom 2 bath lr kit ~ for about $2,000 a month ~ give or take a few bucks. Now you can rent an apartment of comparable features for $3,700 a month.
At the same time we have a large overhang of unsold empty houses.
The people paying rent can pay rent but they can't qualify for those homes because ~ you guessed it ~ they went bankrupt! Banks won't loan to them. Not only that, the banks ~ even in the DC area ~ find it difficult to find funds to loan. Even banks accepting foreign deposits on 0% interest, and charging the depositors for the favor, don't have money to loan. That's all short term stuff. Home loans are long term.
We force banks to lend money at 3.5% the old fashioned way ~ put a cap on interest and infate M1
Apparently you are completely stupid on multiple subjects.
The government "borrowed" the money from itself and has spent the money. It is gone. Whatever the hand-waving involved, the money is gone.
Future Social Security and Medicare benefits will be paid with money taken from future private sector workers and investors.
This is reality. All the rest is just bluster.
If you think there is some moral debt that future workers owe to those who came before them and ran up a $16T national debt, I'd love to hear you explain in straightforward term why that is.
Read the posts on the thread ~ federal personal income taxes can be abolished and all income treated as capital gains. That way you’d have the rich on your side regarding what was a satisfactory deduction.
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