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

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.

The actual fact is that income taxes have always been legal under the Constitution!

If you carefully read the 16th amendment you will see that all it actually did was allows the Congress to levy an income tax without apportioning it among the states or basing it on the United States Census. It exempted income taxes from the constitutional requirements regarding direct taxes, after income taxes on rents, dividends, and interest were ruled to be direct taxes in the court case of Pollock v. Farmers’ Loan & Trust Co. (1895).

Text of the 16th amendment:

“The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.”

The following is directly quoted from “The Communist Manifesto” by Karl Marx chapter II. “Proletarians and Communists” page 7.

Read it then ask yourself the question which follows.

“The proletariat will use its political supremacy top wrest, by degrees, all capital from the bourgeoisie, to centralize all instruments of production in the hands of the State, i.e., of the proletariat organized as the ruling class; and to increase the total of productive forces as rapidly as possible. Of course, in the beginning, this cannot be effected except by means of despotic inroads on the rights of property, and on the conditions of bourgeois production; by means of measures, therefore, which appear economically insufficient and untenable, but which, in the course of the movement, outstrip themselves, necessitate further inroads upon the old social order, and are unavoidable as a means of entirely revolutionizing the mode of production. These measures will of course be different in different countries. Nevertheless in the most advanced countries, the following will be pretty generally applicable.

1. Abolition of property in land and application of all rents of land to public purposes.

2. A heavy progressive or graduated income tax.

3. Abolition of all right of inheritance.

4. Confiscation of the property of all emigrants and rebels.

5. Centralization of credit in the hands of the State, by means of a national bank with state capital and an exclusive monopoly.

6. Centralization of the means of communication and transport in the hands of the State.

7. Extension of factories and instruments of production owned by the State; the bringing into cultivation of waste-lands, and the improvement of the soil generally in accordance with a common plan.

8. Equal liability of all to labor. Establishment of industrial armies, especially for agriculture.

9. Combination of agriculture with manufacturing industries; gradual abolition of the distinction between town and country, by a more equable distribution of the population over the country.

10. Free education for all children in public schools. Abolition of children’s factory labor in its present form. Combination of education with industrial production, &c., &c.

When, in the course of development, class distinctions have disappeared, and all production has been concentrated in the hands of a vast association of the whole nation, the public power will lose its political character. Political power, properly so called, is merely the organized power of one class for oppressing another. If the proletariat during its contest with the bourgeoisie is compelled, by the force of circumstances, to organize itself as a class, if, by means of a revolution, it makes itself the ruling class, and, as such, sweeps away by force the old conditions of production, then it will, along with these conditions, have swept away the conditions for the existence of class antagonisms and of classes generally, and will thereby have abolished its own supremacy as a class. In place of the old bourgeois society, with its classes and class antagonisms, we shall have an association, in which the free development of each is the condition for the free development of all.”

The question is:

Why on earth would the country holding itself up to the world as the CHIEF opponents of Communism want anything at all to do with the very tax system that Communism endorses?

The progressive income tax is a Marxist ideal! What else does one need to know?

Thanks, Bigun. I knew you’d step in to clarify the issue!

Fellow FReepers, we have two opportunities to stop the madness!

November 2014.

November 2016.

If We the People do not elect solid constitution loving conservatives to our local, state and national offices in these critical elections, we and our children and grandchildren will be subjected to horrors that will make the Dark Ages seem like a walk in the park.

Think that your FReedoms and Liberties are God-given and inviolate?

Elect more LIEberals in 2014 and 2016 and find out!

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