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?
No sale.
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?
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