Time to scrap the mortgage interest deduction: Simplify the Tax Code and Lower Tax Rates for All

Washington Examiner ^ | 03/27/2014 | Philip Klein

[SeekAndFind]

In the coming weeks, Americans will spend an average of 13 hours and $210 to prepare their federal taxes. Beyond the compliance burden the federal tax code imposes, it also distorts economic activity and discriminates against some taxpayers in favor of others. But one of its most egregiously unfair provisions is also among its most popular - the mortgage interest deduction.

In theory, the mortgage interest deduction is supposed to encourage home ownership, a questionable goal for government to begin with. The purpose of taxes is to raise money to finance government services, not to manipulate human behavior or economic activity.

When lawmakers tell taxpayers that they can keep more of their money – but only if they spend that money the way politicians want – it’s just as much an exertion of government power as a spending program.

Allowing individuals to deduct mortgage interest payments drives up taxes on other Americans given the need to recoup the lost revenue, or, alternatively, adds to the deficit. The mortgage interest deduction itself drains $100 billion annually from the U.S. Treasury. When other tax policies meant to encourage home ownership are added - including the deductibility of state and local property taxes and the exemption of capital gains taxes from selling a home - that number rises to $175 billion.

But even if one were to accept that boosting home ownership is a worthy goal for government, the interest deduction and accompanying tax benefits for homeowners should be seen as a miserable failure. That's the conclusion of economists Andrew Hanson, Ike Brannon, and Zackary Hawley in a study prepared for the R Street Institute, a right-of-center think tank, and published in National Affairs.

The authors took a detailed look at the distribution of existing tax benefits for home ownership and found that the benefits do more to help wealthier Americans purchase larger homes than they do to encourage lower-income Americans who otherwise would be renting to purchase homes in the first place.

The study found that in Atlanta, Denver, Detroit, Minneapolis, Philadelphia, Phoenix, Seattle and Washington, D.C., 80 percent of taxpayers earning more than $100,000 claimed the deduction, compared with just 25 percent of those earning less.

In monetary terms, the deduction is also significantly more valuable for higher-income households.

The deduction applies to mortgage debt of up to $1 million and debt from second homes can count toward that amount. Furthermore, because high-income earners are taxed at a higher rate, each dollar of earnings they get to deduct from their taxes is worth more.

A family with a household income of $500,000 with $1 million in mortgage debt being financed at 4 percent would generate $16,000 per year in tax savings, according to the authors’ calculations. In contrast, a household earning near the national median income of $51,000 with a home worth $221,000 (the median price), would receive tax savings of one-tenth that amount.

There are several leading objections to scrapping the mortgage interest deduction. One is that it would drive down home prices. Another is that American homeowners already purchased homes and did tax planning on the assumption that the tax benefit would be in place.

As to the first argument, while it’s true that limiting or eliminating the deduction would reduce the artificially inflated value of homes, that would be true of homes everywhere. That means homes would be cheaper for people shopping for new homes, as well as those hoping to sell their current homes and purchase new ones.

Also, proposals to reform the mortgage interest deduction can be designed to phase in the changes over time, so that homeowners can gradually adjust.

Recently, House Ways and Means Chairman Rep. David Camp, R-Mich., offered a comprehensive tax reform proposal that would allow individuals with existing mortgages to keep the deduction as is, while gradually reducing the cap to $500,000 for new mortgages. Another idea proposed by the authors is to change the deduction to a flat rate tax credit, to “limit the subsidy provided to upper-income taxpayers while simultaneously expanding it at the lower end of the income distribution.”

My preferred approach would be to slowly phase it out over time as part of a broader tax reform that lowered tax rates for everybody.

[xzins]

somehow you have to take the entire group of leeches living off the income tax system and demonstrate how a new system would be better for them. Short of that it will take a depression of mammoth proportions to change direction.

[Reeses]

IIRC, you don’t get a deduction for interest on a margin account when you buy stocks on margin.

Margin interest is deducted off the gain so there is no income tax on margin interest expense.

[ZirconEncrustedTweezers]

I wasn’t aware of that. Thank you.

[RayChuang88]

I've been proposing we should at once--starting the 2014 tax year--replace the 73,000-plus pages of the current Federal income tax code (James Joyce's famously unreadable Finnegans Wake is not much harder to decipher than the tax code!) with a simple 18.75% flat rate income tax where the only tax loophole is a generous initial earned income (wages and pension payments) exemption to protect lower-income taxpayers--and no longer include bank account interest, capital gains and stock dividends as part of earned income.

Just this change would mean Americans won't stick their money in offshore financial centers and means there will be way more incentive to keep jobs, factories and corporate headquarters here in the USA, tremendously boosting the US economy.

(By the way, Forbes' original proposal from 1996 was for a 17% rate but keep the FICA tax. I suggest an 18.75% rate to eliminate even the FICA tax.)

[GOPJ]

Well, it’s time to STOP anything that assists the middle class... better to cut this out so MORE money can be sent to Al Gore’s liberal elite pin heads - and what’s left can be given to Holder’ people... and other liberal victim groups...

[Taxman]

A Flat Tax as an interim until the FairTax is in place has long been proposed. I believe Steve Moore was the first prominent economist to propose that plan of action, as a “transition” to the FairTax.

I don’t believe Flat Tax is the way to go, at all!

Flat Tax is still an income tax, and, though the income tax is bad enough, the IRS is even worse.

Flat Tax does not eliminate the IRS.

FairTax does — IRS will be ABOLISHED! And that, my FRiend is one of the major objectives of the FairTax.

So, let us keep pushing FairTax and make the effort to get the legions of Flat Tax supporters into the FairTax camp.

[ncpatriot]

Yeah, Caesar is getting much more than his share. He’s greedy

[Taxman]

I am intrigued by your comment:

“But, if we’re gonna keep shoving this monstrosity down people’s throats, then let’s treat a “household” as a business enterprise trying to make a profit.”

What manner of tinkering with the Internal Revenue Code do you propose?

[xzins]

With a business, they are selling their products or expertise, and that is made possible by having that background structure that makes all that possible...buildings, factories, offices, uniforms, transportion, utilities, etc..

With a family enterprise, they are selling their labor that is made possible by having that background structure that makes all that possible....buildings, garages, offices, transportation, utilities, etc.

Just have everyone file on Schedule C

[Taxman]

Hmmmmm. . .

I’ll have to give that some thought.

[Hoffer Rand]

There seem to be an awful lot of people who don’t understand that if you pay $1000 for a tax deductible expense and it saves you $200 in taxes, you’re still out $800.

This was my exact debate with Hubby. Why pay a mortgage company $1000, just to avoid paying Uncle Sam $200? Doesn't compute, you're still losing money. Once he finally saw that, we just wrote a check and paid the mortgage off.

[xzins]

One advantage of it is that it demonstrates immediately the true state of America’s households...most in hock up to their gill slits.

But it also encourages looking at profit and increasing capital.

It’s far more capitalist.

And it’s really about the wealth of nations. My hope would be that it would increase competition, identify underwater households, and identify non-striving households.

[Rockitz]

Not gonna sell in California and other states with high housing prices.

[RayChuang88]

While I agree FairTax is the ultimate goal, the reason why I propose going to a no-loophole flat tax is that it provides a transition period so the revenue generating mechanism for FairTax can be put into place--say a 3-4 year transition period. And the flat tax already eliminates most of the egregious abuses of the IRS, since it's really hard to use the tax law for political purposes when there is effectively no tax loopholes other than the generous initial earned income exemption.

[teeman8r]

is that only on new homes... if you buy an old home, do you have to pay tax on it.

t

[E. Pluribus Unum]

It doesn’t really help the middle class. You get to deduct the mortgage interest, but you have to borrow more money because the price of the house is higher than it would be were there no mortgage interest deduction. It’s a wash, and it gives the illusion that the government is giving you a break when they really are not.

[eXe]

Yeah funny isn’t it, they are tripping over themselves to remove the mortgage interest deduction, but not a word on the 6 to 7 thousand people get back with the so called “Earned” income tax credit.

[usconservative]

All the mortgage tax deduction does is help inflate the price of homes.

No, the Mortgage Tax Deduction is one of the reasons people actually purchse homes.

Rent is pissing away money, while owning a home builds equity. (Granted, you'll spend far more money on the mortgage itself, maintenance, upkeep, etc.. than you'll ever get back from the sale price when you sell, but the fact is some of that "equity" comes back.)

If you kill the mortgage tax deduction you'll kill what little here is left of a housing industry in this country. Homes won't sell, or they'll have to sell at greatly deflated prices in order to move.

There's also the fact that new home sales generate somewhere between 3-5 long term jobs, so by killing the mortgage interest deduction, you're driving unemployment up as well.

As for me, I don't really give a hoot what they do. My house has long been paid for, when I move I'll pay cash for my next one (downsizing.) Just saying, you eliminate the mortgage interest tax deduction and you kill the housing sector and the larger economy overall. Guarantee that.

[E. Pluribus Unum]

Sometimes what you say is correct, sometimes what you say is not correct.

Thinking like yours is what gets people buried in student loan debt.

You have to do cost/benefit analysis based on local conditions at a given point in time.

Sometimes renting makes total sense, especially if you are only going to live in an area for a few years. Buying a house also restricts your flexibility in being able to easily move to a new area where you can earn more money should an opportunity arise.

And your idea that the purpose of owning a home is to generate jobs is dimwitted union goon thinking.

[Mears]

“Does anyone still deduct mortgage interest? “

—

I do.

.