Home mortgage interest deduction - keep it or toss it?
One of the most popular and beloved deductions among Americans has to be the mortgage deduction. According to New York Times this deduction is supported by almost 90 percent of the population. Wow, the last time this many Americans agreed together probably involved American Idol. Yet with debt ceiling negotiations hitting a fever pitch there is a strong possibility that this popular deduction might be slashed or removed entirely.
The popularity of the deduction especially among middle-class Americans is something of a mystery considering that a vast majority of the people who benefit from the deduction are considered to be top earners (those making over 75k), although your definition of "top earner" may vary. Wealthier people certainly stand to gain more from this deduction due to a simple reality, wealthier people tend to have more money to purchase homes. Those claiming the deduction is portrayed neatly within the NYT article.
In true NYT spirit the article rails against the injustice of wealthy people owning homes and builds a strong case for the removal of the deduction because of its perceived "unfairness". If only more and more people could afford homes, then all would be well in this world. Oh wait, that backfired badly, no?
I present a different argument. In our world where the progressive tax with its thousands of pages is the sad reality, politicians have used the tax code to pass out special favors and perform social engineering for decades. It has now become an accepted fact, that if you want more of something - subsidize it, if you want less of it - tax it. The history of the mortgage deduction is one such example.
Although the United States has provided deductions on interest for as long as there has been an income tax, it was only during the 1986 Tax Reform Act where our politicians got the idea of placing mortgages into a special category. In fact the actual idea was presented even earlier by the most over-rated and beloved conservative figure of all, Ronald Reagan. At the National Association of Realtors in 1984:
Focusing on real prices (inflation adjusted) there was an immediate jump in housing prices after 1986, but prices fell immediately after a massive contraction took place fueled by the 1987 stock market correction. This contraction which lasted through Bush Sr's era was due largely to the massive liquidity expansion facilitated by the Federal Reserve in the 1980s, but I digress. The housing bubble that took place in the late 90s eclipsed the 80s, thus showing that the mortgage deduction is just a small part of price fluctuations in a rather complex market.
That being said, like any other Federal subsidy performed through tax exemptions the costs are real and sometimes hard to pinpoint. Not only do they result in a more complex tax code, but the price distortions can have deep and meaningful consequences on the market as a whole.
In the spirit of true fairness the following should be done. Remove all mortgage interest deductions from the tax code, no exceptions and no adjustments, the whole damn thing - throw it out. Then reduce the rate proportionality across every tax bracket to preserve the 80 Billion within the private sector. This is a revenue neutral move insofar that the Federal Government does not gain any additional revenue because Americans will pay a lower overall tax.
This will have an immediate positive effect on housing prices by stabilizing the true value of home prices by removing the price distortion caused by people buying homes that they normally could not afford due to this incentive. A step in the direction of a universally accepted flat taxes without *any* deductions, preferably with a rate between 0% and 0%.
The popularity of the deduction especially among middle-class Americans is something of a mystery considering that a vast majority of the people who benefit from the deduction are considered to be top earners (those making over 75k), although your definition of "top earner" may vary. Wealthier people certainly stand to gain more from this deduction due to a simple reality, wealthier people tend to have more money to purchase homes. Those claiming the deduction is portrayed neatly within the NYT article.
I present a different argument. In our world where the progressive tax with its thousands of pages is the sad reality, politicians have used the tax code to pass out special favors and perform social engineering for decades. It has now become an accepted fact, that if you want more of something - subsidize it, if you want less of it - tax it. The history of the mortgage deduction is one such example.
Although the United States has provided deductions on interest for as long as there has been an income tax, it was only during the 1986 Tax Reform Act where our politicians got the idea of placing mortgages into a special category. In fact the actual idea was presented even earlier by the most over-rated and beloved conservative figure of all, Ronald Reagan. At the National Association of Realtors in 1984:
"I want you to know that we will preserve the part of the American dream which the home-mortgage-interest deduction symbolizes."Yup. After Reagan observed the power of the Federal Reserve and its ability to jump-start an economy with debt, it was only natural to assume that taking on debt in the housing market would attain the same effect. Now there is no strong correlation between the passing of the 1986 Tax Reform Act and housing prices, but logic suggests that the subsidy principle is at play. In 2009 this subsidy amounted to about 80 Billion dollars, greatly eclipsing the now infamous and notorious Agricultural farm subsidies. If we agree that farm subsidies skew and distort the market and create artificial prices for farm goods, then we can just as easily agree that this massive subsidy distorts and manipulates the housing prices. This historic chart seems to confirm(from JP's real estate charts):
Focusing on real prices (inflation adjusted) there was an immediate jump in housing prices after 1986, but prices fell immediately after a massive contraction took place fueled by the 1987 stock market correction. This contraction which lasted through Bush Sr's era was due largely to the massive liquidity expansion facilitated by the Federal Reserve in the 1980s, but I digress. The housing bubble that took place in the late 90s eclipsed the 80s, thus showing that the mortgage deduction is just a small part of price fluctuations in a rather complex market.
That being said, like any other Federal subsidy performed through tax exemptions the costs are real and sometimes hard to pinpoint. Not only do they result in a more complex tax code, but the price distortions can have deep and meaningful consequences on the market as a whole.
In the spirit of true fairness the following should be done. Remove all mortgage interest deductions from the tax code, no exceptions and no adjustments, the whole damn thing - throw it out. Then reduce the rate proportionality across every tax bracket to preserve the 80 Billion within the private sector. This is a revenue neutral move insofar that the Federal Government does not gain any additional revenue because Americans will pay a lower overall tax.
This will have an immediate positive effect on housing prices by stabilizing the true value of home prices by removing the price distortion caused by people buying homes that they normally could not afford due to this incentive. A step in the direction of a universally accepted flat taxes without *any* deductions, preferably with a rate between 0% and 0%.
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