2 Huge Misconceptions About Killing the Mortgage Interest Deduction

It's hard to have a rational discussion about closing the deficit without considering tax reform. And one of the most effective ways to reform the tax code is eliminating the ability to write off mortgage interest.

The fiscal benefits of this are straightforward. Mortgage interest deductions cost the Treasury as much as $130 billion per year in lost tax revenue. Consider just how much that is. If the cost of subsidizing mortgage interest were a line item in the federal budget, it'd rank as the seventh costliest -- just ahead of education and veterans benefits. The federal government spends more money subsidizing mortgages than on anything other than defense, entitlements, unemployment insurance, and interest. Pretty incredible.

Predictably, though, mere talk of eliminating the credit draws all sorts of hysterical warnings. Some say it'd be a huge tax increase on the middle class. A sucker punch to the housing industry. An attack on the American dream.

Don't buy it. These criticisms are mostly misguided. Here are two of the biggest false claims.

1. It'd be a huge tax increase on the middle class
First, let's get one thing out of the way: The elimination of a tax deduction is not the same as a tax increase. Marginal tax rates don't change.

But that's semantics. The reality is people would pay more taxes. According to The New York Times, House Speaker Nancy Pelosi (D-Calif.) warned that merely reducing the mortgage interest deduction would "force middle-class homeowners to subsidize tax breaks for the wealthy."

Not really. The only taxpayers who gain from the credit are the roughly one-third of filers who itemize deductions rather than take the standard deduction. By and large, these are upper-income folks.  

The Tax Policy Center crunched the numbers and found that a complete elimination of the mortgage interest deduction would raise taxes on only 21.5% of middle-income workers, with an average increase of just $215 a year. The bulk of the increase would fall on the top 10% of wage earners. It's about as progressive as it gets.

The only difference the vast majority of Americans would see from eliminating this credit is a smaller budget deficit.

2. Homeownership rates would decline
First we have to ask: Is that a bad thing?

Realtors, mortgage companies, and politicians would love you to think the answer is yes. As President George W. Bush proclaimed in 2002: "I do believe in the American dream ... and owning a home is a part of that dream. It just is. Right here in America, if you own your own home, you're realizing the American dream." However, reality, as the financial crisis proved, is a little different. High rates of homeownership increase the odds of people living in homes they can't afford. It also decreases labor mobility -- the option of quickly moving to where the jobs are. University of Toronto professor Richard Florida finds that "The most innovative, most productive, and most highly skilled regions have rates of homeownership of 55-to-60 percent, while those where homeownership exceeds 75 or 80 percent are economically distressed."

But that's another topic. Would eliminating the mortgage interest deduction decrease homeownership rates?

Since only those who itemize deductions gain from the credit, the answer is likely no. If you itemize deductions, you're probably relatively wealthy. And if you're relatively wealthy, you're probably going to own rather than rent regardless of tax incentives.

There are good historical examples backing this up. Homeownership rates in the U.K. actually rose after it eliminated a mortgage interest deduction in 2000, from approximately 70% to around 72% by 2005. Furthermore, homeownership rates in the U.S. are roughly equal to those in Canada and Australia, both of which don't allow mortgage interest deduction. The correlation between mortgage interest deductions and homeownership rates seems elusive.

Here's another example: Credit card interest used to be tax deductible until President Ronald Reagan signed the Tax Reform Act of 1986. If you follow the logic of those protesting elimination of the mortgage interest deduction, this should have caused credit card balances to drop as the benefit to borrowers diminished. Instead, balances grew 11% between 1986 and 1987. The benefits of charging up a MasterCard (NYSE: MA  ) or Visa (NYSE: V  ) overwhelmed the small rebate borrowers received every April 15.

For the same reason people didn't stop working in the 1950s when top marginal tax rates were over 90%, they won't stop buying homes if the ability to deduct mortgage interest is taken away. The decision to own a home is based on much, much more than tax incentives.

Get it done with 
Would taking away the credit cause housing prices to fall? Marginally, yes, especially for more expensive homes. But this only highlights another downside of the credit: It artificially props up housing prices by incentivizing small down payments and large mortgages, which is hardly something we should be proud of and try to preserve. 

Ultimately, there are few sane arguments for why eliminating the mortgage interest deduction shouldn't be done. It raises a ton of revenue. It won't affect the majority of taxpayers. And it helps bring the housing market back into natural equilibrium. If anything, the biggest danger is that it makes so much sense that our lawmakers will reject it. 

Check back every Tuesday and Friday for Morgan Housel's columns on finance and economics.

Fool contributor Morgan Housel doesn't own shares of any of the companies mentioned in this article. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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  • Report this Comment On November 23, 2010, at 2:11 PM, SSchey wrote:

    My question to this writter is simple. What makes you think that this would reduce the buget deficit? If our goverement holds true to form they will simpliy turn around and spend twice as much on some other worthless program and increase the size of goverement even further.

    The only true answer to our current problems is simple.

    STOP SPENDING STOP SPENDING STOP SPENDING!

  • Report this Comment On November 23, 2010, at 2:12 PM, aggie9711 wrote:

    "The federal government spends more money subsidizing mortgages than on anything other..."

    The federal government spends NOTHING when I get to keep my own money. That's the equivalent of saying that Kroger spends $99,000 subsidizing my lifestyle because I only spend $1000 on food there.

    Tax cuts, or continuing existing rates, don't "cost" the government, or require them to "spend". Unless you subscribe to the idea that all money is the government's and we are just allowed to have some of it.

    Here's an idea: rescind the rest of the TARP money, cancel all further stimulus spending, end ethanol, agricultural, etc subsidies, reform SS and Medicare BEFORE you start making me pay more taxes.

    Oh, and by the way, I'm not anywhere near upper middle class, and I am able to take the deduction (and use that saved tax money for more useful things, like taking care of my family).

  • Report this Comment On November 23, 2010, at 2:13 PM, michnow wrote:

    Why is the only way to close the budget gap always more taxes. Today someone was talking about high speed rail lines, more spending everyday obama wants 50 billion for this or 100 billion for that. Cut the damn spending.

  • Report this Comment On November 23, 2010, at 2:19 PM, greenvillewolf wrote:

    "Mortgage interest deductions cost the Treasury as much as $130 billion per year in lost tax revenue."

    This statement seems to imply that the Treasury is owed that money. They are not. The money belongs to us, the taxpayers.

  • Report this Comment On November 23, 2010, at 2:24 PM, outoffocus wrote:
  • Report this Comment On November 23, 2010, at 2:41 PM, TMFHousel wrote:

    Most of these comments remind me that the most relevant sentence in this article may have been the first one.

    I'll just add this: Since 2007, the increase in the budget deficit has been over 70% a factor of lost tax revenue and less than 30% a factor of spending increases -- the majority of which are nondiscretionary. Fact.

    I don't doubt that spending needs to be slashed, particularly in entitlements. But when people are viscerally opposed to tax reform at a time when both marginal tax rates and tax revenue as a % of GDP are at or near modern history lows ... it's hard to have a good debate.

    As former Comptroller General David Walker likes to say, "There's a dirty four-letter word in Washington: Math."

  • Report this Comment On November 23, 2010, at 3:18 PM, aggie9711 wrote:

    Yes, I am viscerally opposed to tax increase (it's not tax "reform", it's a tax increase, just admit it Morgan) in a recession with 9.5% unemployment and $1.5 trillion deficits when historical evidence shows that revenues increase with lower taxes (through GDP growth).

    But here's some rationality below :)

    http://www.heritage.org/research/reports/2007/01/ten-myths-a...

    Your 70%/30% argument doesn't hold water (see below). Spending up to 2008 was around 20% of GDP and is now 24+% while revenues have dropped far less than 4%.

    2007 Tax Revenue $2709bil

    2010 Tax Revenue $2118bil

    Difference $591bil

    2007 Spending $2879bil

    2010 Spending $3618bil

    Difference $739bil

    $591bil/$1500bil = 39.4%

    $739bil/$1500bil = 49.2%

    (remaining difference is the existing $170 bil deficit from FY 2007)

    And I'd point out that the drop in revenues is not from lower tax rates (as they have been static since 2007), but from decreased employment. Raising revenues through more taxation will do nothing to ameliorate the unemployment level.

    http://www.heritage.org/Research/Reports/2010/06/Federal-Spe...

  • Report this Comment On November 23, 2010, at 3:27 PM, TMFHousel wrote:

    aggie,

    I don't think it should be looked at as a static period like that. And even if you do, you yourself just showed that about half the deficit, $591 billion worth, is a factor of lost tax revenue.

    Justin Fox moves away from a static view and looks at trends of the past decade; that's where my 70/30 argument comes from.

    http://blogs.reuters.com/justinfox/2010/10/25/whats-really-b...

    thanks for the comments,

    Morgan

  • Report this Comment On November 23, 2010, at 3:32 PM, devoish wrote:

    Federal tax rates have not been static.

    "In a troubling sign for Democrats as they head into the midterm elections, their signature tax cut of the past two years, which decreased income taxes by up to $400 a year for individuals and $800 for married couples, has gone largely unnoticed."

    http://www.nytimes.com/2010/10/19/us/politics/19taxes.html

  • Report this Comment On November 23, 2010, at 3:47 PM, TMFHousel wrote:

    I didn't mention it in this article, but instead this one:

    http://www.fool.com/investing/general/2010/11/12/how-the-gov...

    that removing the interest deduction (and other tax expenditures) could allow marginal rates to fall by as much as half while still bringing in more tax receipts.

  • Report this Comment On November 23, 2010, at 4:56 PM, Bethamphetamine wrote:

    Thank you for writing this up and taking the time to go point-counterpoint with the commenters! I seem to be in the minority that agrees the loss of the mortgage interest deduction won't ruin the country and I appreciate you outlining the broad picture here. Also, outoffocus, your 'i told you so' is right on the money - I hope a lot of folks take a look at that post!

  • Report this Comment On November 23, 2010, at 5:09 PM, TMFHousel wrote:

    "My question to this writter is simple. What makes you think that this would reduce the buget deficit? If our goverement holds true to form they will simpliy turn around and spend twice as much on some other worthless program and increase the size of goverement even further."

    For one, the only time in modern history that we've had some assemblance of fiscal order was when we had the guts to raise tax revenue. (1950s-'60s. Part of Reagan's term. Clinton.)

  • Report this Comment On November 23, 2010, at 5:36 PM, starbucks4ever wrote:

    Just as in the stock market, the best way to promote ownership of houses is by keeping prices low. It's easier to buy a house at a low price than at a high price. Period, end of story.

  • Report this Comment On November 23, 2010, at 5:50 PM, royvb wrote:

    The analysis aboutthe effect of eliminating the mortgage deduction misses the fact that eliminating it also liley moves many taxoayers OUT of itemized deductions and into the standard deduction. That will have the effect of reducing taxpayer expenditure in other areas - like charitable deductions, the benefit of which will also be lost. To the extent losing the deduction discourages home ownership, it will also likley reduce real estate tax bases on which local governments (and thus schools, police abd fire houses) thrive. Someone better do more thinking than the very thin surface analysis presented here. This is a deeper - much deeper - social issue. Disappointing article on its shallowness.

  • Report this Comment On November 23, 2010, at 5:54 PM, TMFBiologyFool wrote:

    It won't lower home ownership because home prices will fall in line with the affordability. There's only so much people can afford each month. That's been generally true of interest rates (low interest rates, mean low payments, which means the house can cost more at the same payment level; the converse is also true look at home prices in the late 70s early 80s). If you eliminate the tax, you're essentially increasing the payment, which means house prices will need to be lower for people to be able to own them.

    -Brian

  • Report this Comment On November 23, 2010, at 6:03 PM, TMFHousel wrote:

    "This is a deeper - much deeper - social issue. Disappointing article on its shallowness."

    It could have gone deeper, but the title of the article is "2 Huge Misconceptions ...." not "A Complete Study On The Effects of ..."

  • Report this Comment On November 23, 2010, at 6:04 PM, FoolishSeattle wrote:

    Here's a simple way to avoid "paying" additional taxes if the mortgage interest deduction is taken away: Pay off your mortgage! Isn't this the behavior we should be encouraging - paying down your mortgage so you have a place to live at a much reduced cost when you're older? In the past 15 years people who have worked to pay off their mortgage have been seen as somewhat financially stupid - Why would you leave money on the table by paying more taxes? Here's why: Without a mortgage my monthly living expenses are dirt cheap and I can retire without fear.

  • Report this Comment On November 23, 2010, at 6:15 PM, TMFHousel wrote:

    "Tax cuts, or continuing existing rates, don't "cost" the government"

    If that's true, than no one can say the stimulus cost $700 billion, as 42% of the package came as tax cuts. On that note, your call to cancel the stimulus would raise taxes.

  • Report this Comment On November 23, 2010, at 6:18 PM, BattyCA wrote:

    The author of this article seems completely disconnected from the realities that I face. Removal of the mortgage interest deduction would bankrupt me and force me to walk away from my home, and I would regard it as such a complete betrayal that I wouldn't feel the least bit guilty about doing that.

    Here's a clue: The San Francisco Bay Area where I live and work has a very high cost of living. Salaries are high, but costs are also high, so although I probably am one of the so-called wealthy based on gross income, at the end of the day I have surprisingly little money to spend after covering the costs of living here. Removing the mortgage-interest deduction would take almost $1000 a month out of my pocket, I simply cannot afford to lose that money.

    I suppose if you are a renter or you live in a low-cost area, repealing the mortgage interest deduction sounds like a fantastic idea. If you are in my situation, it's not.

  • Report this Comment On November 23, 2010, at 6:21 PM, IdaAg wrote:

    Where is your stats to back up your arguments. You state that: by and large the only ones to itemize are upper class folks, the bulk of the increase falls on the top 10% of earners, the answer is likely no. Back that up, these are not quantitative statements but qualitative statements with no backing. I expect more from the Fool than that. Otherwise I can just go listen to Jim Kramer say I like this stock and not give any reasons for it.

    It seems to me that eliminating the deduction is punishing those who have already purchased, I purchased responsibly taking all things into account. This is like passing a law to make something criminal and then prosecuting anyone who had done that thing in the past when it was legal. If we must remove the mortgage interest deduction it should only apply to new purchases and refinances so that it does not hurt those who made decisions based on the current standard.

  • Report this Comment On November 23, 2010, at 6:26 PM, TMFHousel wrote:

    "Where is your stats to back up your arguments. You state that: by and large the only ones to itemize are upper class folks, the bulk of the increase falls on the top 10% of earners, the answer is likely no"

    As the article clearly states, these are sourced from the Tax Policy Center.

    Here's the report if you're interested.

    http://www.taxpolicycenter.org/UploadedPDF/412099-mortgage-d...

  • Report this Comment On November 23, 2010, at 6:46 PM, jm7700229 wrote:

    I took a taxation course when I was an undergrad in the '60s. I felt that the system was so grossly unfair that I couldn't believe it was supported. It has gotten almost infinitely worse since then.

    The rationale for subsidizing mortgages through taxation was outgrown decades ago. If Congress had to write a check for this subsidy instead of reducing taxes, they would have ended it a long time ago. It is a big benefit to higher income people with large mortgages, and they are the people who least need the encouragement to buy. And by the way, I'm one of those higher income people.

    Here's a simple and impossible to implement plan. Eliminate all deductions and credits. Tax all income above a certain point at progressive rates. Reduce those rates to compensate (but only partially -- we still have a deficit). For behavior that Congress wants to encourage (having children, education, home ownership, marriage) by subsidy, application can be made on the 1040 form and Congress would need to write checks to pay for the subsidies. The subsidies would be flat amounts, not dependent on income level or tax bracket. And Congress would see what they are costing.

    Those arguing that entitlements and other government programs must be rationalized are, of course, correct. But we aren't going back to frontier days where people who couldn't work, didn't eat, where poor people could not get an education, where there was little health care and it was primarily available to the rich. So suck it up, guys -- we need to increase taxes, too.

  • Report this Comment On November 23, 2010, at 7:15 PM, kotaknight wrote:

    Removing the mortgage interest deduction would essentially punish those who have already paying a mortgage and would remove the tax refund that is put back into the economy. The reasons to buy a house is to get a break on your taxes and to own an appreciating asset. Itemized deductions are important especially in a state like New Jersey where property taxes are so high. If the mortgage interest deduction is taken away, then property taxes should be greatly reduced. However, the state governments would claim that they could not fund schools and municipal operations.

  • Report this Comment On November 23, 2010, at 7:18 PM, TMFHousel wrote:

    "The reasons to buy a house is to get a break on your taxes and to own an appreciating asset"

    I think that mentality explains a lot of our problems.

  • Report this Comment On November 23, 2010, at 7:23 PM, TheDumbMoney wrote:

    I would echo BattyCA, and my own previous comments on this issue. This deduction is just about the only thing in the tax code indexed to cost of living: $400,000 buys a mansion in much of Texas, and maybe a two bedroom apartment in San Francisco, Calfornia. Are both purchasers 'wealthy'? In a sense yes, but in a sense no, that SF purchaser is really, really not. This deduction does something to correct for that imbalance, and does a little bit to make up for the fact that assuming they make the same nominal amount, the SF purchaser is also paying the same income tax as the Cleveland purchaser (even though everything costs more), and the SF purchaser's federal taxes are also being transferred by and large to people in red states -- who then complain about the federal government even though they benefit disproportionately from its wealth transfers.

    I do get why it might be a good idea to end this deduction, but best to have a clear understanding of this aspect of it, too. Also, it is only responsible for a constant portion of housing prices, and not a huge portion: housing prices in Brittain and in London in particular soared after the deduction was ended, is my recollection.

  • Report this Comment On November 23, 2010, at 7:27 PM, TheDumbMoney wrote:

    Good piece though.

  • Report this Comment On November 23, 2010, at 7:31 PM, TheDumbMoney wrote:

    Essentially what I'm trying to say is the deduction is a sense an offset against the otherwise (and still) net transfers of federal tax revenue from high cost blue states to low cost red states. Sorry for the multi-comments.

  • Report this Comment On November 23, 2010, at 7:50 PM, akutach wrote:

    interest rate deduction provides a benefit to HIGH interest amounts.

    A few hundred dollars tax change is nothing compared to the benefit to those paying $50k or more (that would be ~$700k loan at todays rates). If you're not earning enough to support that loan then your tax break is a mirage, and that puts you well into the upper middle class. This tax is a benefit to high earners only.

    As for those who would see this as a tax increase on a homeowner. Consider that renters mostly do not have this option (to justify itemizing taxes) and so the status quo is essentially a tax targeted at renters. Do we target them because they're not living "The American Dream". Am I less of an American for being a renter? Am I punished during tax time because my dream isn't the sanctioned dream?

  • Report this Comment On November 23, 2010, at 7:55 PM, akutach wrote:

    As for Betty CA's comments, this is not the mechanism for subsidizing home prices because as anyone in SF area knows you bid what you can pay to get the most you can afford (since that's not very much), and that price has the tax break priced in for everybody. Thus, the prices go up and nobody has achieved anything except an unhealthy reliance on a tax deduction to continue affording their home. This is more the reason why the break is for the wealthy and does nothing for the lower earners.

  • Report this Comment On November 23, 2010, at 8:07 PM, chip1945 wrote:

    THE WRITER OMITS ONE IMPORTANT FACT ..... The proposal by the Budget Task Force to eliminate the mortgage tax deduction applies ONLY TO MORTGAGES (not home values) OVER $500,000.00, and that that number may be adjusted by geographical market. Clearly this is not intended to hurt the middle class American homeowner, who in great numbers, are being foreclosed on today. How many of YOU in middle America have mortgages over $500K? More scare tactics by the rich to imply this will apply to everyone. Most we see talk or write about this issue negatively ARE RICH, and should pay a little more in taxes. Don't be bamboozled!

  • Report this Comment On November 23, 2010, at 8:12 PM, KBOKSOFT wrote:

    I bought my home and took a 30-year mortgage with the tax deduction as part of the decision making process. I, in effect, paid more because the federal government is partly subsidizing the purchase (the same way tax breaks subsidize the purchase of energy saving home improvements).

    If the tax break goes away, I get (insert colorful past-tense verb here) twice:

    1. The tax break that influenced a decision made 10 years ago goes away -- with 20 more years of consequences.

    2. The total value of my home goes down, because the government is no longer subsidizing home purchases. I get to take that capital loss at resale.

    Not cool. I'll do my part to save the US economy, but I'd rather not do it by being punished for decisions I already made.

  • Report this Comment On November 23, 2010, at 8:13 PM, TMFHousel wrote:

    "THE WRITER OMITS ONE IMPORTANT FACT ..... The proposal by the Budget Task Force to eliminate the mortgage tax deduction applies ONLY TO MORTGAGES (not home values) OVER $500,000.00"

    There were 3 tax proposals presented by the co-chairs of the budget committee. One proposes the elimination of all tax deductions -- including 100% of the mortgage tax credit. Another, the Wyden-Greg plan, proposes the elimination for mortgages over $500k.

    -Morgan

  • Report this Comment On November 23, 2010, at 9:01 PM, starbucks4ever wrote:

    BattyCA's comment is a perfect illustration. One can easily see that in order to get $1000 a month from the deduction, one must buy a house that costs $750,000 or more. There is simply no reason why we should subsidize this luxury. All the more so that about a third of this ridiculous price simply reflects the value of the deduction we have been giving to the buyers in the past. Simply put, we are offering the deduction in order to drive up the prices so that the owners must have higher mortgage balances so that we can offer an even greater deduction. Time to end this insanity. As for the argument that it would be a retroactive punishment, I can sympathize with that. So in order not to punish BattyCA, let's handle it this way: those who bought within the last 5 years will get to keep the deduction until 2015, but the new buyers will have to get off the taxpayers' neck. This way, the victims of peak prices will get a concession that will help them meet their mortgage obligations. Their property values would still go down, but the government never promised an endless housing rally, so that won't be a breach of the contract.

  • Report this Comment On November 23, 2010, at 9:11 PM, KBOKSOFT wrote:

    zloj, I can't speak for BattyCA but a phased out approach or some kind of grandfathering would at least make the whole thing seem less like a bait-and-switch.

    I mean, what if 20 years from now some politician announces that the government is losing billions in tax revenue by not taxing Roth IRA distributions?

  • Report this Comment On November 23, 2010, at 9:16 PM, starbucks4ever wrote:

    KBOKSOFT,

    Fair enough, but a phased out approach is just what I proposed. It's OK to move a little slower than one would like as long as we move in the right direction.

  • Report this Comment On November 23, 2010, at 9:21 PM, KBOKSOFT wrote:

    zloj, we agree.

    That was easy!

    Morgan, what other problems do you have for us?

  • Report this Comment On November 23, 2010, at 9:29 PM, TMFGalagan wrote:

    Hey Morgan -

    I think a lot of the confusion here comes from the Tax Policy Center's definition of "high income" versus the current administration's $200K/$250K threshold for its proposed tax hikes. From the report (page 3 in the doc):

    "High-income taxpayers are much more likely to itemize than low-income individuals. Poterba and Sinai (2008) find that 85.5 percent of tax units with annual incomes between $75,000 and $125,000 and over 98 percent of tax units with incomes above $125,000 itemize, while only 23.4 percent of those making less than $40,000 itemize."

    Families earning 75K might well be "high-income" in the sense that they're above the median income, but few would think of them as being upper class. And while the absolute value of the benefit being taken away may be small compared to the 500K+ earners, it may well be more significant on a percentage basis - significant enough to have played a major role in the initial home-buying decision.

    Personally, I'm a big fan of paying down home debt anyway, and all the mortgage interest proposals support that, so I favor them. But I can understand why plenty of upper-middle class folks would be ticked off about it.

    best,

    dan (TMF Galagan0

  • Report this Comment On November 23, 2010, at 9:39 PM, ynotc wrote:

    Just imagine the increase in productivity via less time and money spent on tax accountants and lawyers and the savings via abollishing the IRS if we just created a flat tax with no write offs and coupled it with an amendment that forced government to spend only what they collected. No sacred cows on the collection or spending side.

  • Report this Comment On November 23, 2010, at 10:11 PM, BarryWel wrote:

    One thing that I have never understood is how does it make sense to spend $ 1 on taxes or interest to get back only $ .20 to .$ 25 in income taxes.I would appreciate someone explaining this to me.Thank you

  • Report this Comment On November 23, 2010, at 10:40 PM, jm7700229 wrote:

    For an explanation of why we will not fix the deficit until we near bankruptcy, like Ireland and Greece, read the foregoing. There is essentially nothing about what is good for the country and the economy, and everything about my ox being gored and the evil rich benefiting from this deduction.

    A reasonable definition of a good compromise is that everyone is equally unhappy. The commission seems to have achieved this.

  • Report this Comment On November 23, 2010, at 10:54 PM, skypilot2005 wrote:

    "Ultimately, there are few sane arguments for why eliminating the mortgage interest deduction shouldn't be done. It raises a ton of revenue." This statement is based on a false premise. ie.: That we want government to raise "a ton of revenue:. I for one, don't.

    I'll spend my own money.

    The problem is NOT that we aren't paying enough in taxes. The problem is that government is spending too much, on all levels.

    I would like to remind the author that we are for the moment, a capitalist country not a socialist country.

    Socialism has failed. Remember, we are paying for the defense costs of every socialist country in the World via our strong military. Otherwise, none of them could afford their socialist systems.

    Morgan, you need to look at the "Big Picture". Socialism has failed. Capitalism has won. The voters recently spoke at the ballot box and changed Congress. Socialized health care here may not be coming, after all.

  • Report this Comment On November 23, 2010, at 10:59 PM, TMFHousel wrote:

    skypilot2005,

    To be sure, the elimination of a tax deduction doesn't meet most people's definition of socialism.

    Morgan

  • Report this Comment On November 23, 2010, at 11:20 PM, rd80 wrote:

    Has anyone looked into how many current homeowners barely making payments would either walk or be forced in to default if they lose the deduction?

    As several commenters noted, tax policy was a factor in a buyer's affordability determination for nearly every home purchase made for the past several decades.

    Even if very few lose their homes or play jingle mail, loss of the home mortgage deduction would drive home prices lower (not necessarily a bad thing) and put even more homeowners upside down (definitely a bad thing).

  • Report this Comment On November 23, 2010, at 11:41 PM, TheDumbMoney wrote:

    Skypilot = low hanging fruit.

    rd80: This is all academic. As we all know, none of these potential solutions will be pursued in the near future anyway, and our country will spiral ever closer to disaster, until, at the last moment, all the extemists on both sides of our political system stop playing chicken and do what is right. (In case you missed it, that's optimism.)

  • Report this Comment On November 24, 2010, at 12:06 AM, TMFHousel wrote:

    "The government should help pay for your home by offerring tax write-offs that unfairly favor homebuyers over renters? You can complain about losing that in one sentence and rail against socialism in the next? REALLY?"

    Brilliant. Truthisntstupid continues to be my favorite TMF commenter, hands down.

    -Morgan

  • Report this Comment On November 24, 2010, at 12:44 AM, tricktrack wrote:

    This comment probably won't win me any popularity contests around here, but I have to make this response to the previous comments. Those of you who feel you're "entitled" to a mortgage interest deduction are equally annoying to me as those who feel they're "entitled" to perpetual, unlimited, free health care. You're simply opposite sides of the same coin. (Don't get too uptight, I've tussled with several "progressives" regarding their ideas of entitlement as well.)

    jm7700229, you're dead on with your comment. It seems that no matter what aspect of the economy is discussed, people on both sides are experts at telling everyone else how much they should sacrifice, while their own benefits absolutely must be spared. We're not going to get of the situation we're currently in solely by taxing, or growing, or spending, or cutting, or exporting. Anyone who thinks the deficit can be erased by using only one of these methods is in for a rude awakening down the road.

  • Report this Comment On November 24, 2010, at 2:29 AM, wrkdiver wrote:

    I HAVE to agree with those who say "It's NOT THE DAMN GOVERNMENTS DAMN MONEY!'

    Get the torches and pitchforks, folks!

  • Report this Comment On November 24, 2010, at 6:33 AM, nivekluap wrote:

    "NONdiscretionary" spending...Bull----,every penny the govt. spends is discretionary. Anyone who has ever made a personal budget knows this.

    KD

  • Report this Comment On November 24, 2010, at 8:50 AM, capnbrian wrote:

    i would rather see the gov't cut spending than increase taxes...i have no confidence that any additional monies uncle sam swipes from me would actually go towards deficit reduction, while we are still up to our ears in a game of "team america - world police" and on the verge of a second korean conflict...

  • Report this Comment On November 24, 2010, at 9:54 AM, nohup wrote:

    "First, let's get one thing out of the way: The elimination of a tax deduction is not the same as a tax increase."

    I'm taking it with a grain of salt, but my dog tilted his head and looked at me kinda funny when I read that comment aloud.

  • Report this Comment On November 24, 2010, at 10:06 AM, PhulishMortal wrote:

    Too many people are proposing a simple fix in the form of less federal spending. It isn't a matter of "less spending" vs "more revenue." If we are to get our fiscal house into any sort of order, we are going to need to achieve both of those.

    If you add my wife's income and mine, we just fall into the >$75,000/yr bracket that was mentioned above. That means that we would be affected by the deduction removal, at least in one of its suggested forms; even so, I say bring it on. This is too serious a matter to put off until we are in a desperate a strait as Ireland and Greece.

  • Report this Comment On November 24, 2010, at 10:06 AM, livinglearning wrote:

    tricktrack - i agree w/ you 100%. If it's spending, then it's considered socialist. What's the difference? This is entitlement just the same. The mortgage interest deduction has got to go away. It makes no sense whatsoever (and, yes, I itemize!).

    Plus, for those that say this is a tax increase, you are wrong. The tax rate isn't changed at all.

  • Report this Comment On November 24, 2010, at 11:04 AM, DivingDan wrote:

    I have problems with this statistic, "The Tax Policy Center crunched the numbers and found that a complete elimination of the mortgage interest deduction would raise taxes on only 21.5% of middle-income workers, with an average increase of just $215 a year. The bulk of the increase would fall on the top 10% of wage earners. It's about as progressive as it gets.

    I'm middle class. I own a home, and itemize deductions. I would lose over $3,000 a year if the mortgage deduction was eliminated as would many of my neighbors and co-workers. This number does not make sense unless there were millions of people who get less than $50 back. This number does not make any sense.

  • Report this Comment On November 24, 2010, at 11:31 AM, Melaschasm wrote:

    I will support just about any tax simplification proposal that does not increase taxes. Since this proposal is a tax increase, it is DOA.

  • Report this Comment On November 24, 2010, at 11:38 AM, TMFDiogenes wrote:

    "tricktrack - i agree w/ you 100%. If it's spending, then it's considered socialist. "

    lolz: Article 1 Sec. 8 of the US Constitution:

    "The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States..."

    I guess the Founding Fathers were card-carrying commies.

  • Report this Comment On November 24, 2010, at 11:42 AM, Turfscape wrote:

    DivingDan wrote:

    "I would lose over $3,000 a year if the mortgage deduction was eliminated as would many of my neighbors and co-workers."

    Are you sure about your math? By itemizing, your mortgage interest nets you $3000 more than the standard deduction? How much is your monthly interest payment?

  • Report this Comment On November 24, 2010, at 11:42 AM, TMFDiogenes wrote:

    livinglearning -- but I agree with your main point, that the mortgage interest deduction should probably be eliminated.

  • Report this Comment On November 24, 2010, at 11:45 AM, Turfscape wrote:

    Melaschasm wrote:

    "Since this proposal is a tax increase, it is DOA."

    Bit of a stretch to call removal of an ineffective deduction a "tax increase", don't you think?

  • Report this Comment On November 24, 2010, at 11:49 AM, TMFHousel wrote:

    To call the elimination of a tax deduction a tax hike is like saying the price of something doubled the day after a 50% sale ended. Technically true, logically so flawed it hurts.

  • Report this Comment On November 24, 2010, at 11:49 AM, sept2749 wrote:

    How about a 5% across the board Federal Income tax with no deductions. Haven't done any research but I have a feeling we'd net more . Between the reduction of the IRS employees + perks, tax courts, enforcement costs, incarceration, etc... Everyone could afford 5%. Then we could stop nit picking about proposed tax "reforms".

  • Report this Comment On November 24, 2010, at 3:21 PM, nottheSEC wrote:

    What escapes me is its not our money as oft quoted above. Its is the ability to deduct a portion of the financing from a personal transaction.

    I.E.I buy a $25,000 car I normally don't have the ability to deduct the interest NOR should I get rewarded if I can afford to finance a $500,000 Ferrari.

    I partially agree with Mr Housel the credit should be eliminated but for houses over $250,000.The promise of the America dream behooves our facilitation but only for that "starter" home. If that starter home small 1 bedroom in Queens, NY for $250,000 or a 3 bedroom ranch in Omaha, NE it doesn't matter to me. What matters at $250,001 your interest deduction ALONE exceeds $15,000 per annum for the first 5-7 years.

    I think in fairness you shouldn't be ENTITLED to my subsidy.

  • Report this Comment On November 24, 2010, at 3:53 PM, ddepperman wrote:

    Interesting bunch of comments--a few intelligent, the rest poorly thought out and stated in an unreasonable manner.

    TMFHousel, you wrote a fine little article.

    I don't own a house, and if I did I'd apply for the deduction because it is there, but it shouldn't be.

    This would be only a little step, but a good one to get our financial house in order. Of course it won't pass, because there is no intelligence left in congress, owned by the lobbies.

    Without NEW jobs to build a new economy, this nation may see another mini bubble as fewer people have access to the remaining jobs, decreasing the workforce and the purchasing publlic.

    Every tinhorn dictatorship has figured out that a tiny moneyed class creates a workable system, one that they can continue to rule. Same thing has happened and continues to worsen here.

    But sooner rather than later this system will fail, as certain as death and taxes, and lying politicians.

    And then Government will be forced to try--first ineffectually--to balance the budget. Everything will then change in a big way. At that time government will simply shrink. it won't be pretty.

    We cannot ever afford to privatize the police, and in fact privatizing any part of govt is generally idiotic as we found out in Iraq losing tens of billions to private contractors.

    I see a lawless future presided over by a dictatorship, with absolute access to all our private records, and able to commit the abuses that affords them.

    Can't let this happen. Only way is to start thinking clearly and stop jerking your knees.

    Luck.

  • Report this Comment On November 24, 2010, at 5:49 PM, nontechie wrote:

    First of all, I question the much-repeated statement in this article that only people who itemize benefit from the mortgage deduction. At least in relatively high cost areas like the west coast and upper east coast, paying mortgage interest in and of itself usually makes it worthwhile to itemize. If my mortgage interest were not deductible, I probably wouldn't benefit from itemizing--but it is and I do.

    I favor making a small step on this by making interest paid on a PRIMARY RESIDENCE only deductible. That way, you'd really hit mainly the wealthy rather than middle class folks who live in areas where housing is expensive (like Nancy Pelosi's constituents of whom I am one).

  • Report this Comment On November 24, 2010, at 5:52 PM, TMFHousel wrote:

    "First of all, I question the much-repeated statement in this article that only people who itemize benefit from the mortgage deduction. "

    It's a fact. If you don't itemize, you don't benefit from the deduction.

  • Report this Comment On November 25, 2010, at 1:04 AM, wkrick wrote:

    http://moslerforsenate.com/wp-content/uploads/2010/06/7DIF.p...

    Seven Deadly Innocent Frauds of Economic Policy

    1. The government must raise funds through taxation or borrowing in order to spend. In other words, government spending is limited by its ability to tax or borrow.

    2. With government deficits, we are leaving our debt burden to our children.

    3. Government budget deficits take away savings.

    4. Social Security is broken.

    5. The trade deficit is an unsustainable imbalance that takes away jobs and output.

    6. We need savings to provide the funds for investment.

    7. It’s a bad thing that higher deficits today mean higher taxes tomorrow.

  • Report this Comment On November 25, 2010, at 1:15 AM, dave665 wrote:

    I am in favor of the fair tax (http://www.fairtax.org/site/PageServer?pagename=about_main), which is a consumption-based tax rather than income-based. This would make these types of deductions irrelevant and the tax system much fairer and simpler.

  • Report this Comment On November 25, 2010, at 9:54 AM, showmethefacts wrote:

    I agree with dave655 that a sales/consumption tax instead of (not in addition to) income taxation, would be a huge benefit to our economy. With income tax, only honest people who report their income accurately pay tax. The HUGE and hidden number of Americans who live in a cash economy do not pay tax, or at least not a fair share. Think of how many people smoke a little marijuana and where do they get it? Drug dealers, who live in a cash economy. Coke dealers too. And not only "criminals" but strippers, waiters, waitresses, owners of businesses who take in a lot of cash sales -- many under-report income to "save" on taxes due. But ALL of them, from the cocaine dealer to the body shop who gives you a discount for paying in cash, buy things. They buy food and TVs and cars and everything else. If you tax sales instead of honestly reported income, you will bring huge numbers of freeloaders into the system and everyone's tax rates can fall. You have to temper it with something to limit the regressive impact on the poorest among us, such as having a no-tax generic aisle at stores for basics like milk, diapers, etc. Congress is so bribed by the various special interests who like one or more of the subsidies in our current convoluted tax code that this kind of switch from the unfair income tax to a modified fair tax is almost inconceivable -- but it should happen. We should demand it.

  • Report this Comment On November 25, 2010, at 10:01 AM, showmethefacts wrote:

    And, as for you people who keep saying "stop the spending," be careful for what you wish for. Think about it. The truth that the right wing especially refuses to admit is that without TARP/the bailout (Bush-Paulson and Obama-Geitner), unemployment would have been 35% not 10% and the American economy would have spiraled down to 1937 Depression levels. Yes, it would have. Republican economists agree. Why else would Bush and Paulson go for it? They HAD to. And, no, that would not have been good, even if it did "prove" that the economy will self-correct if let alone. Only the super-rich (and I mean top .5% ultra-rich) could weather a 1937-like Depression. The spending saved the economy. Stimulus spending and QE are undesirable, but the alternatives are even more undesirable. It took years of foolish policies -- including the mindless "all regulation is bad" Big Lie that led to the credit default swap mess -- to get us in this mess, so it looks like it will take years of muddling along with deficit spending to get us out. Bernanke should be praised not ridiculed for saving us from far worse. Even Bush deserves some credit for his bailout, instead of tea party venom. Obama saved the auto industry -- a good thing -- and continued the stimulus started under his predecessor. I only wish he had spent more, on the big infrastructure projects we need, like our Chinese rivals are doing.

    Hate away, you Limbaugh-logic know-nothings! If you get your way, I'll see you in the bread lines.

  • Report this Comment On November 26, 2010, at 11:26 AM, upnup8 wrote:

    Eliminating the mortgage interest deduction would be short sighted. The government (and the public) have an interest in a significant portion of the population being non-migratory. If all the people in an community rent, pick up and move wherever the jobs take them, no one invests in the infrastructure necessary to make this country run. Why would I build roads, schools, hospitals if I don't expect to be living in the area very long? Why would I maintain bridges, fire departments and police stations if next year I'll be moving on down a dirt road to the next thing that catches my fancy?

    additionally, all of you folks in fooldom, I assume you have assets? If so, stop whining about paying taxes. Those poor people who don't get the benefit of that mortgage interest deduction also don't get the benefit of the SEC since they don't own any stock. Nor do the care much about the Fed or FDIC since they don't have money in banks. The fire department protects your houses, the poor don't own so they need the fire department as much. If you own stuff, the police department protects you from being robbed by those who have less. Public education provides the poor with a dream so they don't come after yours in the dark of night. So unless you can protect all you have on your own, be happy you have income to pay taxes on.

  • Report this Comment On November 26, 2010, at 11:27 AM, 2Fastidious wrote:

    truthisntstupid writes: "I'm a low-wage worker that pays no taxes. I never asked for a handout."

    I think there is a disconnect there. The handout he's receiving is his national security, national parks, and all other federal goods. Even with my mortgage deduction, I am covering his share of those costs as I pay my income taxes.

  • Report this Comment On November 26, 2010, at 11:42 AM, 2Fastidious wrote:

    Morgan:

    Excellent point about consumer debt continuing to climb even after the Reagan-era repeal of the deducability of credit card interest.

  • Report this Comment On November 26, 2010, at 12:25 PM, 2Fastidious wrote:

    To truthisntstupid:

    Thank you for your service.

  • Report this Comment On November 26, 2010, at 2:26 PM, 42theflush wrote:

    truthisntstupid wrote: "we should all be paying something"...

    Hallelujah! This is why we should inact the Fair Tax. We need to attack the tax and spend problem. I suggest we start on the tax side first by instituting a method that is less suseptible to manipulation and has a wider base. Then institute a temporary spending freeze while spending is reviewed and slashed.

  • Report this Comment On November 27, 2010, at 1:26 AM, wpepoon wrote:

    Gee, millions of people like me who are upside down need to be punished even more!

    Take away my mortgage deduction and I'll walk away from my house the very next day. And buy a gun...

  • Report this Comment On November 27, 2010, at 1:37 AM, TMFHousel wrote:

    "Gee, millions of people like me who are upside down need to be punished even more!"

    It's a new level of entitlement when not being subsidized counts as punishment.

  • Report this Comment On November 27, 2010, at 6:14 AM, Libertarian71 wrote:

    "It's a new level of entitlement when not being subsidized counts as punishment."

    Only a clown like Morgan Housel would claim that the mortgage interest deduction is an "entitlement." Morgan, the money is ours to begin with. And aren't you the clown that was praising the Bailouts and the Stimulus a year ago?

    Morgan, what you do not understand is that any revenues realized by the government from eliminating the deduction will not go to discharge any part of the national debt. It will be used for more spending.

  • Report this Comment On November 27, 2010, at 7:06 AM, skypilot2005 wrote:

    skypilot2005,

    To be sure, the elimination of a tax deduction doesn't meet most people's definition of socialism.

    Morgan

    Morgan,

    I disagree.

    The definition of Socialism: “Any of various economic and political theories advocating collective or governmental ownership and administration of the means of production and distribution of goods.”

    Capitalism: “An economic system characterized by private or corporate ownership of capital goods, by investments that are determined by private decision, and by prices, production, and the distribution of goods that are determined mainly by competition in a free market.”

    When the government increases my taxes, by eliminating deductions, I have less money to spend on goods, services, investments, etc. Aka: Private decision. They take that money and THEY decide what goods and services to purchase. Collective distribution. That is Socialism plain and simple.

  • Report this Comment On November 27, 2010, at 7:08 AM, cupocoffee wrote:

    Taking this discussion one step further KeynesSucks hits the nail on the head by raising the issue of "revenues realilzed by the government from eliminating the deduction" would most lilkely be used for more spending by our elected representatives. The electorate is watching for thoughtful and responsible movement from Washington and it's about time.

  • Report this Comment On November 27, 2010, at 9:42 AM, TMFHousel wrote:

    skypilot2005,

    OK. You win. If we end a subsidy that favors homeowners over renters, you're right, we're all a bunch of socialists and borderline Bolsheviks. I thought I saw the red in Regan's eyes when he ended the credit card interest tax deduction in the '80s, too.

    Keynessucks:

    "Only a clown like Morgan Housel would claim that the mortgage interest deduction is an "entitlement."

    I'm saying you think *you're* entitled. The idea that because one has debt -- and the more, the better -- the less taxes one should have to pay compared with those who do not is what I consider an entitlement.

    Thanks for the comments, all.

    Morgan

  • Report this Comment On November 27, 2010, at 11:51 AM, aleax wrote:

    @upnup8, you say "The government (and the public) have an interest in a significant portion of the population being non-migratory. If all the people in an community rent,"... then you're probably in a city in Switzerland, or Germany -- the fact is that, in an industrialized country, having a large fraction of the urban population rent (rather than own), is a very substantial advantage to the economy! Once you've made it extremely costly and inconvenient for many workers to move to other geographies where the jobs are -- and that's what it literally MEANS to make them "non-migratory"! -- you've handicapped your country's economy by removing a big measure of flexibility and resilience from the job market.

    Traditionally, the amount of time US urban and suburban residents lived in each single home before moving was way shorter than in most other advanced economies: this mobility used to be a big part of the US's "secret sauce" for economic growth.

    Germany and Switzerland, with their high rates of renting and low rates of home ownership, don't seem to have any problem maintaining superb infrastructure, in many ways superior to the US's: from the autobahns to the high speed trains, from the energy grid to the water systems, their world-class engineering and high sense of civic involvement and participation make them truly enviable in many ways. Clearly this shows that the popular urban legend in favor of "non-migratory" workers, that you present, is exactly that -- a myth, a noxious meme that should be wiped out of our cultural organism like we'd strive to wipe out a dangerous virus infecting our physical bodies.

    The UK started removing mortgage interest deduction under the government of Margaret Thatcher -- remember her, the fierce, battling conservative Prime Minister who scaled down the British state, cut taxes, cut spending, defeated unions, &c -- the great buddy of your Mr Reagan, with his years in power coinciding with part of hers? That _Thatcher_'s policies should now be described by some of this thread's commenters (presumably US citizens) as "socialist", only goes to show how madly political discourse has degenerated in this country, in the course of the last 30 years or so. Reagan himself, as part of his tax reforms, slashed a lot of previously existing deductions fiercely (although not, alas, this particular sacred cow), yet to propose it today is "socialist"... utter madness!

    And nowhere mentioned in this article and comments is that the main current proposal for removing this tax-subsidy (and others) also cuts spending savagely (ratio between spending side and income side proposals about 70-30), AND comes with a reduction in top marginal rate which, depending on how thoroughly the other measures can be enacted, could easily go down to 30% (from the 40% it's supposed to go back to on Jan 1 under current law). I pay about $18,000 a year in interest on my mortgage, so losing the tax deduction, at a rate of 40%, would cost me $7,000 a year. But if at least $70,000 of my income end up taxed at 30% instead of 40%, I'm back to even -- just in terms of cash out of pocket -- AND living in a much happier and less distortionary economy, where my decision to own or rent is one _I_ fully get to make, without nudges, subsidies, and nanny-state babysitting.

    Rather, the income-side measures that worry me are those which affect MARGINAL rates -- EITC, for the working poor, and favored taxation of qualified dividends and long-term capital gains, for investors.

    Marginal rates are the aspect of taxation which affects and distorts the economy (as every economics 101 course should have taught you all, all that matters in economics happens at the margin!-); people do respond to incentives, and removing incentives to work (rather than stay on the dole) via EITC (a great bipartisan achievement whose merits are shared by both Rep and Dem administrations), and incentives to save and invest with decently long time frames (via lower rates on qualified dividends and long-term capital gains), might work out pretty badly. (I doubt the intention is to promote day-trading against years-horizon investing... yet it's exactly the direction in which the incentives would go -- not to even mention the moral issue that taxing the proceeds of your savings is double taxation, as you paid tax on the income from which you saved that money to invest, too!-).

  • Report this Comment On November 27, 2010, at 12:13 PM, TMFHousel wrote:

    "Morgan, what you do not understand is that any revenues realized by the government from eliminating the deduction will not go to discharge any part of the national debt. It will be used for more spending."

    Pick a period in modern history that you think our current fiscal policy should model -- likely one with small deficits or surpluses. Odds are overwhelming that it had higher marginal rates and higher rates of revenue as a % of GDP.

    That brings up another point: So many people waited until marginal tax rates and taxes as a % of GDP were the lowest in modern history before complaining about how high they were. When Reagan eliminated subsidies and put top tax marginal rates at 50%, he was promoting the capitalist engine. When Obama's debt panel proposes eliminating subsidies and lowering top rates to 27%, we're all a bunch of commies. I get it now.

    I don't doubt that spending needs to be cut, eventually substantially. What I disagree with, and strongly, is that the deficit can effectively be eliminated without even looking at the other half the equation: revenue.

    Again, thanks for the comments.

    Morgan

  • Report this Comment On November 27, 2010, at 12:16 PM, TMFHousel wrote:

    "And nowhere mentioned in this article and comments is that the main current proposal for removing this tax-subsidy ... comes with a reduction in top marginal rate which"

    I regret not making that clearer. It's mentioned in the link in the first sentence. Thanks for pointing it out.

  • Report this Comment On November 27, 2010, at 2:30 PM, PebbledShore wrote:

    There are so many comments here about "our money" and "stop spending." Like it or not, the federal government of the United States has huge fiscal burdens, all purportedly to "provide for the common Defence and general Welfare of the United States" (Article I, Section 8). Sticking our collective fingers in our collective ears and humming "God Bless America" ain't goin' to solve our problems, nor will doing the same while quoting Ayn Rand or Rand Paul, for that matter.

    As Morgan just pointed out, "taxes as a % of GDP [are] the lowest in modern history," so let's get some perspective on the revenue side of the issue and stop pretending that somehow we're suppose to maintain the most powerful and wealthy country on earth by not paying for it.

  • Report this Comment On November 27, 2010, at 2:32 PM, Miamifireman wrote:

    I am considered "middle class" and even though I have it a lot better than many I can say that the true middle class struggles and I believe is rapidly disappearing in reality. I believe that is because we have become a corporate controlled nation as Nader proclaims. I do honestly believe that the rich are getting richer and everyone else for the most part, especially middle class is losing ground. I have long greatly benifited by the mortgage deduction tax law and see it as one of the few middle class tax breaks. If it has to go than so be it. My bigger concern than losing it is that once again, working/middle class will pay and the big boys will not. Will we see the huge corporations like Exonn Mobile and Wall Street companies do their part or will they continue to pile up record profits, subsidies and tax dodges while looking for ever more cheap labor abroad? It's just like TARP and the bailouts. Maybe it had to be. But when you read that they are right back to their old shenanigans, greed and policies that make them ripe for another collapse you have to feel like we were sold out yet again. Don't get me wrong. I am here because I am an investor and believe in the American capitalist system. I just think that the playing field has become more and more slanted against the working/middle class largely aided and abbeted by politicians bought out by special interests and the powerful. I just don't believe that sacrifice will truely be spread all the way up the ladder.

  • Report this Comment On November 27, 2010, at 4:18 PM, fanzi2 wrote:

    Don't tax you! Don't tax me! Tax that guy behind the tree!

    Nobody wants to pay any more taxes than are absolutely necessary even if we agree with the premise that taxes are the price of civilization. If we don't want to end up as a bankrupt nation, we must address our deficit. I personally believe that the best way to do so is to grow our economy to increase revenues.

    Additionally, a simplification of our tax code, with the goal of everyone paying their fair share to take a swipe at the deficit, would be a thing of wonder, a holiday gift for one and all. Unfortunately there is usually a trade-off between simplicity and equity in our tax code. Once we start carving out exceptions to achieve equity, we start climbing a slippery slope and slide into the lobbyists' "Fortress of Turpitude," where we're trapped trying to find that guy behind the tree to tax, and from which there is no easy escape.

    The mortgage interest deduction may be a huge "tax-expenditure" that looks a lot like a sacred cow in the American political economy. But it is a cow with a lot more behind it than the dairy lobby. Nothing less than the American Dream feeds this once sacred cow. Although the Dream has lost some of its luster in the wake of our recent mortgage disaster, home ownership remains a cornerstone of the American Dream.

    Should government continue to subsidize the American Dream? Once a subsidy or tax expenditure is started, it's hard to stop. In this case, eliminating the mortgage interest deduction, would pull the rug out from under individuals who have planned their fixed cost base and other personal finances around their homes. It's tough, if not unfair, to pull individuals' financial rugs out from under them. It seems like going out onto the battle field after the financial apocalypse and shooting the wounded. The garden variety home-owner is not responsible for our financial calamity, although we must all work together to extricate ourselves from it.

    There is no easy solution but we should address both the revenue and expenditure side of the equation and create a tax policy that is equitable and encourages saving and investment rather than rewarding mountains of debt.

  • Report this Comment On November 27, 2010, at 11:53 PM, Libertarian71 wrote:

    Morgan said: Pick a period in modern history that you think our current fiscal policy should model -- likely one with small deficits or surpluses. Odds are overwhelming that it had higher marginal rates and higher rates of revenue as a % of GDP."

    I sure wish the Motley Fool would have more reality-based columnists.

    Morgan, you are completely avoiding the issue. Any new revenue from eliminating the deduction will be used to fund more spending, not discharge existing debts. If you really believe that the politicians in Washington will take these new revenues, and actually use them to discharge a portion of the national debt, then I have a bridge in Brooklyn I would like to sell you, my friend. It is unbelievable how gullible and obtuse you are on this issue.

  • Report this Comment On November 28, 2010, at 4:34 PM, gjmiller1 wrote:

    You would have to be a real fool to believe any of the arguments in this article. "The only taxpayers who gain from the credit are the roughly one-third of filers who itemize deductions rather than take the standard deduction. By and large, these are upper-income folks."

    What is an "upper-income folk"? Anyone who makes over 40k a year?

    "The Tax Policy Center crunched the numbers and found that a complete elimination of the mortgage interest deduction would raise taxes on only 21.5% of middle-income workers, with an average increase of just $215 a year."

    Who is the "Tax Policy Center" that we (or you) should take their word? For a modest mortgage (say 200k) at a reasonably good interest rate (say 5%), on a very middle class family (well under 100k - try anywhere from 50k to 75k), if the deduction were eliminated, you can be sure their taxes would climb considerably more than $215 a year. Just try it on your tax software from last year. The numbers will speak for themselves.

  • Report this Comment On November 28, 2010, at 5:25 PM, busterbuddy wrote:

    So at the point of trying to be civil you full of Cow dong honey. Just what is a high income tax payer. Well lets see. Two teachers in the New York city school system? Two Marriage College educated Engineers working in the Aerospace industry make about $140k together. And if they live in Southern California or New york their home cost is over $1200 a month in mortgage. So if you remove that deduction you raise their taxes. And if you raise their taxes then they will be able to spend as much money at the grocery store thus Sales taxes for Local communities will go down. So step up to the plate gubber head and remove the mortgage deduction and watch what happens. With logic like your you should be an advisor to the president. KIll all the migrating buttfiles in Mexico and the number of Hurricane's will go down. Well just bless your heart a little because maybe your are just naive.

  • Report this Comment On November 28, 2010, at 6:35 PM, TMFHousel wrote:

    I'm still in utter awe at the number of commenters who think that not having a government subsidy on something is akin to socialism.

    If asked "Would you like the government to stop meddling in the housing market?" most of these people would say yes. If asked, "Should the government tax renters more than homeowners?" most would say no, that tax rates should be the same for everyone. If asked, "Should those who choose to go into debt carry less of society's burden than those who do not?" most should shout no from the rooftops. Yet when these exact policies comes up in context of removing the mortgage deduction, hysteria abounds.

    Removing the mortgage interest deduction is not a tax increase. It's simply bringing mortgage-holders' tax rates up to par with those who choose to go debt-free. And in the process, the president's debt commission actually proposes slashing marginal rates.

    As conservative Harvard economist Greg Mankiw puts it: "This approach has long been the basic recipe for tax reform. By broadening the tax base and lowering tax rates, we can increase government revenue and distort incentives less. That should command widespread applause across the ideological spectrum."

    He goes on: "Let’s face it: subsidizing homeowners is the same as penalizing renters. In the end, someone has to pick up the tab."

    (Here's the rest of the article: http://www.nytimes.com/2010/11/21/business/economy/21view.ht...

    Thanks again for the comments, everyone.

  • Report this Comment On November 28, 2010, at 9:32 PM, Libertarian71 wrote:

    All you need to know about Morgan Housel can be summed up in his reliance on data from the Tax Policy Center ("TPC"). The TPC is a joint project of Brookings and the Urban Institute, both of which are left-wing think tanks filled with Democrat operatives. Not even Morgan can deny this.

    Both Brookings and the TPC favor the imposition of a Value Added Tax ("VAT"), a tax on each stage of production used by European socialist welfare states: http://www.brookings.edu/opinions/2010/0414_VAT_aaron_sawhil...

    Interestingly, Brookings, the Urban Institute, and the Tax Policy Center have staff that run in the same circles as the left-wing Economic Policy Institute ("EPI"). The EPI, in concert with the Service Employees International Union (SEIU), has come out in favor of confiscation, by the federal government, of all 401(k) and IRA plans. The EPI proposal was authored by socialist Teresa Ghilarducci, a public policy expert at the New School for Social Research. Ghilarducci has been a member of the Democratic Socialists of America. The plan can be viewed here: http://www.sharedprosperity.org/bp204/bp204.pdf

    Under the Ghilarducci plan, your IRA or 401(k) will basically be turned into another Social Security-type guaranteed benefit plan administered by the federal government.

    I have been suspicious of Morgan Housel ever since he started penning articles in favor of the Wall Street bailouts and runaway deficit spending.

    So this is what we need to know from Morgan Housel, to assess his real agenda:

    1. Morgan, do you favor the imposition of a VAT or national sales tax in the U.S.

    2. Morgan, do you favor confiscation by the federal government of 401(k) plans and IRA, to be replaced by a centralized retirement system administered by the federal government?

    3. Why do you keep avoiding the fact that any revenues realized through the elimination of the mortgage interest deduction will only go to further spending, and not to discharge existing debts of the federal government.

  • Report this Comment On November 28, 2010, at 10:26 PM, be42long wrote:

    When did the Motley Fool become an affliliate of MSNBC and the democratic party? This is getting to be disgusting. Do you guys get your talking points directly from the White House?

    It is a tax increase. Neither party gets it...cut the spending, period. Don't raise taxes. Cut the spending. Don't tell me that its not a tax increase.

    Oh, and there is no inflation right now either!

  • Report this Comment On November 28, 2010, at 10:26 PM, buyn2hold wrote:

    Morgan,

    I'm having trouble understanding this part of your article:

    "The Tax Policy Center crunched the numbers and found that a complete elimination of the mortgage interest deduction would raise taxes on only 21.5% of middle-income workers, with an average increase of just $215 a year. The bulk of the increase would fall on the top 10% of wage earners. It's about as progressive as it gets."

    Itemized deductions are phased out at income levels of $125,000 for single filers and $250,000 for MFJ. I don't know what you or the TPC consider middle income, but the implication that the bulk of the increase will fall on the most wealthy individuals (top 10%) is misleading at best. The wealthiest would not be affected at all because they can't take the deduction now.

  • Report this Comment On November 28, 2010, at 10:37 PM, TMFHousel wrote:

    "So this is what we need to know from Morgan Housel, to assess his real agenda: 1. Morgan, do you favor the imposition of a VAT or national sales tax in the U.S."

    No.

    "2. Morgan, do you favor confiscation by the federal government of 401(k) plans and IRA, to be replaced by a centralized retirement system administered by the federal government?"

    No. And get a grip.

    "3. Why do you keep avoiding the fact that any revenues realized through the elimination of the mortgage interest deduction will only go to further spending, and not to discharge existing debts of the federal government."

    I'm in favor of bringing both taxes and spending as a % of GDP back to historic averages.That ultimately means raising more tax revenue, as tax revenues as a % of GDP are at modern history lows. Otherwise, any deficit reduction plan would have to entail dropping spending as a % of GDP miles below historic averages, which is both politically infeasible (no matter what party is in charge -- show me history disproving that) and essentially arithmetically impossible given retiring baby boomers.

    Thanks for the interview.

  • Report this Comment On November 28, 2010, at 10:52 PM, TMFHousel wrote:

    "When did the Motley Fool become an affliliate of MSNBC and the democratic party?"

    Interestingly, the idea of eliminating deductions and lowering marginal rates in an effort to broaden the tax base was championed by Reagan. Funny how much times have changed.

  • Report this Comment On November 28, 2010, at 10:59 PM, TMFHousel wrote:

    "Itemized deductions are phased out at income levels of $125,000 for single filers and $250,000 for MFJ. I don't know what you or the TPC consider middle income, but the implication that the bulk of the increase will fall on the most wealthy individuals (top 10%) is misleading at best. The wealthiest would not be affected at all because they can't take the deduction now."

    False. Phaseouts have been phased out (completely this year), and even when they were in place (as they likely will be next year) the maximum phaseout amount is 80%.

  • Report this Comment On November 28, 2010, at 11:25 PM, TMFHousel wrote:

    Keynessucks,

    "The EPI, in concert with the Service Employees International Union (SEIU), has come out in favor of confiscation, by the federal government, of all 401(k) and IRA plans ... The plan can be viewed here: http://www.sharedprosperity.org/bp204/bp204.pdf"

    While I still don't support it, the plan proposes absolutely nothing of the sort. It proposes ending tax deductions for 401k and IRAs and using higher tax revenues to create defined benefit plans.

    From the paper: "Tax breaks for 401(k)-style plans and IRAs will be converted into flat tax credits to offset the cost of these new accounts, so the plan will improve the retirement security of most Americans without costing taxpayers more than the current system."

    Furthermore: "These plans [401ks] will not be abolished, but under the Guaranteed Retirement Account plan additional contributions will no longer be tax exempt."

    More: "Accumulations in 401(k) plans and other retirement plans that exist before the bill goes into effect will be treated under the old tax rules."

    thanks,

    morgan

  • Report this Comment On November 29, 2010, at 12:33 AM, aptosjoe wrote:

    Good article Morgan. Obviously a hot button issue given all the heat you're taking.

    But to be realistic for a moment, I don't expect Congress, whether controlled by either Party to stop spending, nor do I expect them to raise taxes or seriously reform the current tax system. So to me the whole argument, pro and con, is moot.

    Here's an idea, lets just default on all debt, private and public. Then the next generation will have a blank slate to start over on. Or perhaps the Chinese will bail us out. Now there's a idea!

  • Report this Comment On November 29, 2010, at 1:26 AM, Libertarian71 wrote:

    Morgan,

    I you do not think that Teresa Ghilarducci, the author of the EPI paper, is not in favor of governmental confiscation of 401(k) accounts and IRAs, then you are sorely mistaken.

    I would encourage everyone to read this article from October 2008: http://money.usnews.com/money/blogs/capital-commerce/2008/10...

    According to the author: "House Democrats recently invited Teresa Ghilarducci, a professor at the New School of Social Research, to testify before a subcommittee on her idea to eliminate the preferential tax treatment of the popular retirement plans. In place of 401(k) plans, she would have workers transfer their dough into government-created "guaranteed retirement accounts" for every worker. The government would deposit $600 (inflation indexed) every year into the GRAs. Each worker would also have to save 5 percent of pay into the accounts, to which the government would pay a measly 3 percent return."

  • Report this Comment On November 29, 2010, at 1:40 AM, Libertarian71 wrote:

    Morgan,

    How do you justify your plan for eliminating the mortgage interest deduction to a middle class couple in Southern California? We have some of the highest housing costs in the country out here. Also, the Lunatic Left in Sacramento and the public employee unions, with their costly pension benefits, completely control this State. Spending is completely out of control.

    Aside from the high housing costs, we also have among the highest state income tax in the country, and even the sales tax in LA Country is almost 10%. The only source of tax relief which allows couples to save for the future, and for retirement, is: (1) the mortgage interest deduction, which you want to eliminate, and (2) the ability to contribute, on a tax advantaged basis, to 401(k) plans and IRAs, which it sounds like you also would be in favor of, given your affinity with the Tax Policy Center, a left-wing think tank.

    The fact is, Morgan, you are an affluent elitist who does not live in the real world, does not have any experience living paycheck to paycheck, and do not appreciate the difficulty people face in trying to save for the future. You want to vitiate the ONLY source of tax relief to middle class couples.

    It's pretty outrageous that the Motley Fool, which last time I checked was supposed to be in the business of HELPING small-fry investors, would give you a platform to elaborate your anti-middle class, pro-tax, pro-big government (you did support the bailouts), pro-spending, anti-investor agenda.

  • Report this Comment On November 29, 2010, at 9:33 AM, TMFHousel wrote:

    Keynessucks,

    "I you do not think that Teresa Ghilarducci, the author of the EPI paper, is not in favor of governmental confiscation of 401(k) accounts and IRAs, then you are sorely mistaken."

    Neither Ghilarducci's paper nor the blog you followed up with says a word about confiscating 401k accounts. Ghilarducci's paper explicitly says otherwise: "These plans [401ks] will not be abolished, but under the Guaranteed Retirement Account plan additional contributions will no longer be tax exempt ...Accumulations in 401(k) plans and other retirement plans that exist before the bill goes into effect will be treated under the old tax rules."

    Here's what she proposes: She'd end tax deductibility on retirement accounts, and use the savings to fund defined benefit plans. If you have an existing 401k or IRA, it doesn't get touched, and the tax laws don't change -- the only change is on future contributions. If I missed the part in her paper that says the govt will confiscate your existing account, please point it out. I'll reiterate that I don't support her plan.

    "How do you justify your plan for eliminating the mortgage interest deduction to a middle class couple in Southern California? ... Aside from the high housing costs, we also have among the highest state income tax in the country, and even the sales tax in LA Country is almost 10%."

    I was a middle-class worker in Los Angeles until I moved a year ago. I rented a place I could afford. Honestly, it wasn't a bad life. Furthermore, housing affordability would likely come down after the mortgage interest deduction was eliminated.

    My view on housing is this: Only those who can afford a house should own one. If you can't afford one without a wealth transfer from renters to homeowners, then you shouldn't own. I'm amazed that's a point of contention.

    "The fact is, Morgan, you are an affluent elitist who does not live in the real world, does not have any experience living paycheck to paycheck"

    I'd like to know what your standards for facts are.

    Thanks,

    Morgan

  • Report this Comment On November 29, 2010, at 2:39 PM, oaktb wrote:

    One thing I don't think I've seen mentioned yet is that RENTERS benefit from the mtg interest deduction too as it keeps fininancing costs lower for the landlord which (should) result in lower rents.

    Now, I'm sure a bunch of renters will jump in and say "my landlord will just pocket that extra money, blah, blah, blah, so I'm not getting anything for it."

    I just don't believe this. When renter's vote for increased parcel taxes to benefit, say, parks or police, do they pay extra right away? No, the landlord does.

    It's all part of a delicate, capitalistic balance. Both sides benefit.

    This is not an argument for or against the mortgage interest deduction - just pointing out that RENTERS may be getting some benefit too based on the landlord's costs being lower.

    (NOTE: I'm thinking more about homes, condos being rented vs. larger scale commercial projects.)

  • Report this Comment On November 29, 2010, at 3:13 PM, mikenpdx wrote:

    I am not the smartest person or the most informed person on this issue and someone could make me look really stupid here if they really wanted too...

    so it is with a little hesitation that I even offer a comment here but here goes my attempt at a rational response.

    i'd consider, with an open mind, the argument that we should eliminate the mortgage interest deduction as a good idea in theory. However, given the timing of such a proposal I am inclined to view it as a bad idea.

    my reasons why (and I am flying at 30,000 feet here people and these are pretty objective points i think)

    1) in the near term, it would further price declines on homes. if there are, as many say, still alot of bad loans out there, and a lot of people who can't afford them then this would seem to further accelerate the rate of foreclosures. This would increase inventory, cause comps to fall as more bank-owned properties sell at a discount, hurt banks (not to mention the current controversy with banks and foreclosure processes).

    2) if you accept that the recent recession was in large part due to a collapse in the housing market (for various reasons) I can't see how this makes the housing market any better and thus help the economy. Even if your mortgage is paid off, your house would be worth even less if you were to ever try and sell it so indirectly it would affect those that don't take the deduction as well.

    3) what's bad for the housing market can't be good for employment in that sector.

    4) there's no guarantee that doing away with the deduction would accomplish what is laid out in the arguments for doing so.

    5) consumer spending is ~70% of GDP. GDP is relatively low and growing really slowly. This seems pretty clear at the end of the day the consumer has less to spend without the deduction that he does today with the deduction in place.

    I'm not sure, at this point in time, that this measure is going to help reduce the unemployment rate and put people back to work. That, to me, seems like it should be the main focus at this time.

    I see, theoretically, how eliminating this deduction could help get the deficit under control. But that is not guaranteed. On the other hand, the negative side effects would almost certainly play out as a result regardless of what the government does with the money. The negatives are almost guaranteed by way of market fundamentals while the positives are more dependent on a responsible government keeping its word. (this is intended to be an objective statement). The government has two choices. they could choose to spend it or use it to reduce the deficit. i'm not considering the probability or likelihood here of one way or another. I give equal weight to both which would put you at 50/50 chance of it accomplishing the stated goal of reducing the deficit.

    As far as comparisons with London and Australia, I don't know much about those situations but maybe someone can help me understand, "is this really an apples to apples comparison when considering timing and all the variables and factors that come into play?"

    At the end of the day, I think the idea has some merits but that the timing is really bad.

    just my two cents.

  • Report this Comment On November 29, 2010, at 3:15 PM, ikkyu2 wrote:

    Many would lose their homes and have to sell, because they had already factored the deduction into their financial planning. The resulting glut on the market would further depress home prices, which if you haven't noticed fell so far and so fast in 2007-2010 that they caused a global financial crisis. Therefore, getting rid of the mortgage deduction would just mean another round of government sponsored bailouts, and if they followed the current model, it would mean a lot of people losing their homes so that the banks that repossessed them could get bailed out. In this scenario no one wins, not even the budget.

    Looking at it from another angle, I recently purchased a home. The Federal and state homebuyer tax credits were factors - incentives - in my decision, but by far the biggest incentive was the mortgage tax deduction. Without it, buying the home didn't even make financial sense.

    Changing the rules of the game - yanking the rug out from people who were trying to plan for their future - seems unjust to me. Under this model, those people now have to become rentiers, paying landlords for the privilege of living in a home. Who benefits? The class of people who can buy up rental property at depressed values without having to wonder if their takehome pay will cover the payments - in other words, the very rich. I'd be comfortable deferring yet another government handout to that class, thank you very much.

  • Report this Comment On November 29, 2010, at 3:15 PM, yalewamb wrote:

    Eliminating the mortgage interest is clearly a middle class tax hike in disguise - perhaps upper middle class, but clearly FAMILIES, young families making under $150K. I am in the early years of my mortgage and got an excellent fixed rate of 3.99% (on a mortgage balance that is less than 2 times my income w/ a 20% down payment - responsible). Still, my interest is about $10K per year. Even if my marginal rate is 25% (I squeak up to 28%), I lose $2,500 per year under this scenario. Already mortgage interest is phased out - allowed only on the first $1 million of debt - which means the UPPER rich who finance their houses only get the interest on the first million subsidized. As my mortgage gets older, I pay less interest per year and have less of a deduction; thus, it hurts the younger families and singles in the early years of home ownership. Also, if your tax bill is too low because you have high interest, you get hit with AMT (did the research group back out of the mortgage interest deduction anyone who wound up paying AMT?). So clearly, eliminating this deduction hits quite a few people in the middle. If we blow away the mortgage interest deduction, will we also get rid of the deductibility of the state income taxes as well? as those people living in states with either a sales tax OR an income tax clearly benefit over those that live in a state with both (and have to choose between). I'll take the mortgage hit if and only if the hedge fund employees pay taxes on their take as ordinary income.

  • Report this Comment On November 29, 2010, at 3:51 PM, sol wrote:

    Why should certain types of personal expenditures (home mortgage interest, medical expenses, etc.) be given a preference over other personal expenditures (clothing, food, home utilities, etc.)? I fully understand the rationale of deductions for state income tax (which one does not have a choice about paying) and for expenses incurred to earn taxable income (investment expense, employee business expense). Everything else is a personal expenditure and should not receive capricious preferences based solely on lobbying by the industries that sell that particular good or service.

  • Report this Comment On November 29, 2010, at 4:11 PM, mtf00l wrote:

    @TMFHousel

    I get what you do now.

    All press is good press so you pick issues you know will be controversial, pick one or two points of contention and let the games begin! =)

    Wow, I'm glad that's behind me!

  • Report this Comment On November 29, 2010, at 4:15 PM, TMFHousel wrote:

    "@TMFHousel

    "I get what you do now. All press is good press so you pick issues you know will be controversial, pick one or two points of contention and let the games begin! =)."

    I never intentionally try to be controversial, but I will say this. If a writer is not stirring any debate, he or she has essentially failed at their job. I can say the sky is blue, and no one will argue with me ... but no one will learn anything, add their feedback for others to see, or try to think about an issue in ways they hadn't before.

    Morgan

  • Report this Comment On November 29, 2010, at 4:22 PM, mtf00l wrote:

    Res ipsa loquitur

  • Report this Comment On November 29, 2010, at 5:13 PM, adams76 wrote:

    Sorry Morgan.........do not agree with your analysis at all and expect that much of it has to do with the problem of using averages.

    But I tell you what.....you get Congress to drop the tax break for those making over $250,000.....yes, the 2% who would benefit if the tax breaks were extended and then we'll talk about the "only 21%" who are benefiting from the mortgage deduction.

    As one of those 21%, I calculated this benefit into my decision regarding my home purchase and it would feel like a very major tax increase.... a lot more than the $215 you quote.

    Your argument was amazingly simplistic.

  • Report this Comment On November 29, 2010, at 5:18 PM, MellowGuy1 wrote:

    There is already a one million dollar limit on a home mortgage for income tax deductiblity.

    Landlords who rent out a property can deduct interest payments from rental income.

    The government is getting taxes from the mortgage lender, so without deductibility, there is double taxation.

    Families that don't have a mortgage, don't have to pay any taxes equivalent to what mortgage payments would be.

  • Report this Comment On November 29, 2010, at 5:35 PM, TMFDiogenes wrote:

    Without the deduction, it's likely prices would fall, making housing more affordable, thus partially compensating for the preferential tax treatment mortgage borrowers get. But frogdog (nice name!) brings up a good point:

    "i'd consider, with an open mind, the argument that we should eliminate the mortgage interest deduction as a good idea in theory. However, given the timing of such a proposal I am inclined to view it as a bad idea."

    If implemented immediately, eliminating the deduction could have a negative impact on the housing market. Two things: 1) You could phase the plan in gradually, or have it take effect in a few years, after the housing market has recovered somewhat. One danger here for those who would eliminate the tax expenditure is that proponents be able to reinstate it in the interim.

    2) The more important point (and one that's likely to generate some hate) is that NONE of the mainstream proposals for shoring up the deficit aren't draconian in some way. Unless you're going to raise taxes on the rich probably to somewhere between the 50% and 90% they enjoyed under Reagan and Eisenhower respectively, you're probably going to be cutting programs that benefit the economy and raising taxes on the middle class. In comparison to the mainstream alternatives -- firing teachers and policemen, cutting social security, etc., -- killing mortgage subsidies might not be the most harmful thing we could do to the economy if we decide that looking tough on short term deficits are more important than providing meager fiscal support for an economic recovery or allowing tax rates for the wealthy to return to historical norms.

    (Yes, some people are proposing things like a financial transactions tax on high frequency trading, eliminating tax loopholes for hedge fund managers, etc... those sorts of things may sound rational, but they'd hit Wall Street and the ultra-wealthy so are DOA.) Basically, I'd cut this before embarking on some of the other austerity measures under consideration.

  • Report this Comment On November 29, 2010, at 6:01 PM, Libertarian71 wrote:

    Morgan Housel's agenda for America:

    (1) Bailouts for the Wall Street bankers. According to Morgan, they are are not "bailouts," but an "investment."

    http://www.fool.com/investing/dividends-income/2008/09/29/th...

    (Someone, please introduce Morgan to the concept of moral hazard).

    (2) Raise taxes:

    http://www.fool.com/investing/general/2010/04/16/why-the-us-...

    (2) Eliminate the mortgage interest deduction for middle-class homeowners.

  • Report this Comment On November 29, 2010, at 7:25 PM, TMFDiogenes wrote:

    "Morgan Housel's agenda for America:

    (1) Bailouts for the Wall Street bankers. According to Morgan, they are are not "bailouts," but an "investment.""

    On the contrary, the article you cited claimed the (cough-- Bush--cough) bailouts were both bailouts and investments:

    "The proposed $700 billion isn't a donation, a grant, or a gift -- it's an investment. The money will be used to purchase assets from banks at a steep discount to nominal value, and then sold down the road once the smoke clears. The proceeds from those sales will ... say it with me ... go back to the Treasury and pay off the debt issued for the bailout. "

    This is true. The $700b wasn't handed over as a present. Rather, some $350b was used to buy securities and invest in the stock of companies, which have mostly been recouped. Treasury will probably take a small loss on TARP overall.

    Maybe this is the part that gets a careless reader worked up:

    "Half-truth: This is a bailout of Wall Street

    Oh, boy. I can already hear the keyboards furiously punching out the hate mail on this one. But please, hear me out. This is not a bailout of Wall Street: It's a bailout of the American financial system from a problem caused by Wall Street (as well as Main Street). There's a tremendous difference between the two."

    I don't want to put words in Morgan's mouth, but I'd suspect that, two years later, he'd add that while it wasn't a bailout of shareholders, the overall the response turned out to be overly generous to the bankers and management.

    Morgan and I have written pretty extensively on the need to deal with moral hazard by breaking up the banks. Wall Street is holding our economy hostage. The way you deal with hostage-taking isn't to call it a bluff until they get tired of executing hostages (the let'em fail camp), but to prevent hostage-taking in the first place (limits on bank size, concentration, and risk-taking.)

    http://www.fool.com/investing/general/2009/11/13/its-time-to...

    http://www.fool.com/investing/general/2010/04/28/nows-your-c...

    http://www.fool.com/investing/general/2010/11/05/your-chance...

    thanks,

    Ilan

  • Report this Comment On November 30, 2010, at 4:14 AM, Libertarian71 wrote:

    TMFDiogenes:

    (1) Not sure why you were "coughing" about the "Bush bailouts." They certainly were Bush's bailouts. I am no fan of Bush. He ran up the national debt with impunity.

    (2) Nice to see that you are a fan of Shellac. I've seen them several times live, over a decade ago. Big Albini fan.

    (3) Nothing "careless" about my reading. (And is that the way for a Motley Fool employee to refer to a loyal subscriber who happens to disagree with a columnist?) Morgan supported the $700 billion bailout of Wall Street bankers. And Morgan favors slamming the middle class by eliminating the mortgage interest deduction. So he's for bailing out Wall Street bankers, and eliminating a major source of tax relief to the middle class. Say a lot about his priorities. And he is gullible enough to believe that the revenues raised through eliminating the deduction would go to discharging part of the national debt.

    Again, I just find it so ironic that the Motley Fool, which claims its mission is to help small fry investors, would give Morgan a platform to push his anti-middle class, pro-tax, pro-Big Government agenda.

  • Report this Comment On November 30, 2010, at 8:34 AM, Bert31 wrote:

    I wonder if the next step is to eliminate the tax subsidies I get for contributing to my 401K and IRA? We can start by having the government acutally write us a check after recieving the tax money, so they can see exactly how much it is costing them to allow us to take this deduction. What do you guys think? Then, they can use that money for more important things? Great idea or what? They have lots of worthwhile prgrams that need funding...

  • Report this Comment On November 30, 2010, at 9:17 AM, daherbie wrote:

    You state that home prices would fall, ownership would go down. And you know that many would pay off mortgages sooner if there was no deduction.

    So the real income to gov't would be much less than 130Billion.

    Get rid of the alternative min tax first (or raise the income level to 500K) and then put a cap on mortgage interest deductions.

    And cut gov't spending - There is no need for federal education system for example.

  • Report this Comment On November 30, 2010, at 9:29 AM, mtf00l wrote:

    @ KeynesSucks

    I'm glad the TMF does allow all manner of oppinions on their site.

    It is up to the reader to determine/figure out the "game" if there is one. (See my posts above.)

  • Report this Comment On November 30, 2010, at 11:03 AM, Gator626 wrote:

    My first TMF comment .... be gentle!

    I agree with a lot of what Morgan has had to say (that to a degree, the mortgage interest deduction is essentially an entitlement - considering that those who have larger debt interest payments end up receiving more of the benefit), as well that all the deduction does is artificially prop up real estate prices. Based on that, I would partially agree that the deduction needs to be phased out somehow.

    However, if the intent of eliminating the mortgage interest deduction is to increase tax revenues, there is one significant oversight. Bear with me here...

    Most statistics I have seen indicate that the cause of the expanding federal budget deficits have been caused by a decrease in tax revenue, particularly in the 2007-present timeframe. We could possibly say that would be due to Bush's tax cuts, but as many comments have argued, federal tax revenues increased beyond inflation rates 2003-2007. So, can we also argue that the cause of the lost tax revenue post 2007 may have been due to a decrease in the consumer base (i.e. more people had less money to spend)? Might the reason for this have been due to their assets (homes) decreasing in value while their debts (adjustable rate mortgages) increasing?

    While taking an aggressive approach to this (eliminating the tax deduction for all mortgage) would display an immediate impact on the deficit at a high level, the 21.5 percent of middle income workers that Morgan speaks of will feel the biggest blow out of all of them, considering the amount of cash they get to keep is a larger percentage of their total household income. With that impact, we will continue to see more mortgages held my middle-income earners fall into foreclosure, in turn causing a sharper decline in home values, as well as the consumer base to keep GDP and tax revenues stable.

    All self-righteous arguments aside (let's for a moment disregard what person A believes to be an entitlement vs person B), I think a strategical, phased approach to decreasing/eliminating the mortgage interest tax deduction may minimize the pain on those it will impact, while also attacking the 2nd half of the federal budget deficit problem (tax revenues).

    As some mentioned, an elimination of the interest deduction for 2nd/vacation/investment/rental homes might be a great start. Decreasing the amount of interest a home over $300K may deduction, while eliminating the deduction for a $700K home entirely may be something to consider - and these numbers could be adjusted on a per-region basis. A third option (alongside the two aforementioned) would be to grandfather the elimination so that any mortgages taken out after a certain date may have less (or no) deduction.

    Anyway, just a newbie's take on the matter!

  • Report this Comment On November 30, 2010, at 11:25 AM, smcmilllan wrote:

    The writer's assumption that only upper income earners itemize their taxes reveals his ignorance of how meager the standard deduction actually is. Any single income family that locked in a 30 year mortgage in the "low interest rate environment" of the early 2000s, that pays their health insurance out of their net pay, and that has an average level of property tax burden can easily gain from itemizing over taking the standard deduction. Since purchasing our home we have averaged almost double the deduction by itemizing rather than using the standard. The writer might benefit from reviewing his tax filings from previous years as it seems the seasonal H.R. block employee has been steering him in the wrong direction.

  • Report this Comment On November 30, 2010, at 11:45 AM, TMFHousel wrote:

    "Any single income family that locked in a 30 year mortgage in the "low interest rate environment" of the early 2000s, that pays their health insurance out of their net pay, and that has an average level of property tax burden can easily gain from itemizing over taking the standard deduction."

    Yet two thirds of filers don't itemize.

  • Report this Comment On November 30, 2010, at 11:45 AM, TMFHousel wrote:

    "The writer might benefit from reviewing his tax filings from previous years as it seems the seasonal H.R. block employee has been steering him in the wrong direction."

    I do itemize.

  • Report this Comment On November 30, 2010, at 12:08 PM, TMFDiogenes wrote:

    KeynesSucks,

    Just to clarify, there's absolutely nothing wrong with disagreeing with an author -- I know I certainly love a good debate in my articles. Wasn't trying to specifically call you careless -- what I meant to say is that a careless reading of that passage would get anyone worked up. Frankly, the passage would get me worked up if I didn't already know that Morgan is certainly no fan of Wall Street.

    This is a reasonable, "pro-middle class" opinion: Letting the financial system and economy collapse in order to teach those banks a lesson wouldn't have been worth it. (The key decision-makers already made their money anyways). So the way you handle financial crises is with an ounce of prevention -- bail out the system to prevent a collapse this time, but fire management, break up tbtf banks, and set up laws and rules that prevent them from doing socially useless but systemically dangerous things and change the incentive structure. That way we don't have choose between bailouts and depressions next time. The fact that that's not what happened, does show that Wall Street to a a large extent, in the complaint of Sen. Durbin, "owns this place."

    I hope that's something else we can agree on, besides Shellac's awesomeness. (Yeah, Albini and Trainer are insanely good live.)

    Ilan

  • Report this Comment On November 30, 2010, at 2:26 PM, Libertarian71 wrote:

    (1) TMFDiogenes said: "Letting the financial system and economy collapse in order to teach those banks a lesson wouldn't have been worth it."

    I do not believe the economy would have collapsed absent bailouts. It seems like you have bought the Government's narrative of events hook, line, and sinker. The $700 billion figure was plucked out of thin air by Hank Paulson. The malinvestment caused by the housing and financial crisis needed to be liquidated and purged out of the system so the economy could be stronger go forward. Instead, the economy continues to be anemic: http://www.youtube.com/watch?v=d0nERTFo-Sk

    (2) to mtf001: To be clear, I enjoy reading Morgan, and value his opinion, which usually reflects Elite Thinking. Error is frequently instructive.

    (3) TMFDiogenes: Surfer Rosa was such a great recording by Albini. It was over 20 years ago, but still sounds more relevant and forward to anything today. And in terms of live bands, nothing has ever or will ever top The Jesus Lizard; Albini recorded most of their albums.

  • Report this Comment On November 30, 2010, at 3:16 PM, penboy wrote:

    I've paid off most of my mortgage, and taking away mortgage interest deduction won't affect me much.

    However, I feel sorry for those who just bought their first homes and lose out on a sizeable tax savings.

    I believe it'll be around 2k of tax reduction for interests on a 200k loan.

  • Report this Comment On November 30, 2010, at 3:17 PM, rvanden956 wrote:

    Now let's get this right. The mortgage deduction is in reality only a transfer of income from me to the bank. Without it, I would pay the tax on the income, send the payment to the bank so they could pay income on the interest received also. Double taxation again!! I don't think so!!!

  • Report this Comment On November 30, 2010, at 3:23 PM, TMFHousel wrote:

    "I feel sorry for those who just bought their first homes and lose out on a sizeable tax savings."

    Do you have the same sympathy for those who rent and go no deduction at all?

  • Report this Comment On November 30, 2010, at 3:30 PM, mtf00l wrote:

    Perhaps something of interest is that individuals pay taxes before expenses however, businesses pay taxes after expenses.

  • Report this Comment On November 30, 2010, at 3:39 PM, Turfscape wrote:

    rvanden956 wrote:"Double taxation again!! I don't think so!!!"

    Hmmm...I think, then, that income taxes might be double taxation, too: My employer pays taxes...pays me, then I pay taxes on my pay...then I use some of my pay to buy products made by my employer, and my employer then pays taxes on what I paid to them for their product, then they pay me, then I pay my taxes.... Wait...that's like triple, or maybe quadruple taxation! Holy Cow, we're blowing the lid off this scheme now!

  • Report this Comment On November 30, 2010, at 4:39 PM, TheDumbMoney wrote:

    Having reviewed the comments again on this highly interesting and active thread, I have a few more thoughts:

    1) Morgan, you keep pointing out that two thirds of tax filers don't itemize. Specifically, in the article you say, "The only taxpayers who gain from the credit are the roughly one-third of filers who itemize deductions rather than take the standard deduction." I'm sorry, but that seems a bit misleading I think. In terms of the impact of eliminating this deduction, the issue is not how many *taxpayers* itemize, but how many taxpayers *who actually have mortgages* itemize. I suspect a higher proportion of home owners itemize, in part of course because of this tax deduction. I take no position on the Tax Policy Center's ultimate conclusion however, as I haven't read their report. But standing alone, I don't think the "only two thirds of taxpayers [generally] itemize" line has much merit.

    2) Politics: the mortgage interest deduction will eventually go away, is my prediction. Morgan has pretty much articulated the view of liberals-to-moderate democrats, and non-ideological but fiscally-conservativish independents. More interestingly, red-blooded conservatives have recently decided they hate it as well. The reasons aren't quite as clear to me, but as I alluded to in an earlier comment, I think it is in part because they recognize it as a transfer payment that largely takes money from the top 50% of earners (top 50% pays 97% of all taxes) in cheap, generally low-cost-of-living red states (who are on average conservative), and transfers that money to the top 50% of earners in high-cost-of-living blue states (who are far more likely to be liberal). Thus, while the renter/owner distinction also exists, eliminating the deduction literally takes money out of the hands of limousine liberals in California and New York, and puts it in the hands of rich oil guys from Texas. Brett Arends recently published a truly wonderful piece about how California bails out America, available here if the link works: http://www.marketwatch.com/story/the-truth-about-california-.... I just caution spear-toting populist progressives who want to jump on this bandwagon to be aware that the mortgage interest deduction is one of the few things staunching that flow. (Conservatives are statistically older and richer, meaning they likely have homes, and have paid off their homes years ago, and don't benefit from the deduction anyway.) There is simply no other rational reason on this earth why Fox News would be advocating the same thing as Morgan advocates here. Just note the broader strategic ramifications, that is all I am saying folks. Or tell me I'm totally wrong about the cost-of-living waelth-transfer thing.

    3) renter vs. owner. I get that that's a great political talking point, and to the extent poor renters are subsidizing rich owners, it's bad. But I have two responses to this. First, it's only bad to the extent that those renters are unable to buy. If they can buy, and don't, then too bad, at least to a certain extent: having been a high-income renter for the entire past decade, I can tell you I absolutely knew what bed I was lying in, and had rational reasons for not buying. Don't pity those people, at all. Second, the top 50% of earners pay 97% or so of all taxes (at least in 2008). Per the most recent census data I can see, 80-to-90% of people in the top two quintiles of households own homes (and in the middle fifth quintile, 70% own). If you fit those two data sets over each other, it's pretty easy to see that the $-numerical or even percentage extent to which renters are subsidizing owners can be, er, very easily overstated....

  • Report this Comment On December 02, 2010, at 4:02 PM, chabango wrote:

    Typical liberal view point.

  • Report this Comment On August 06, 2011, at 4:28 AM, areuserious wrote:

    I can assure you that there are MANY of us who itemize deductions and we are NOT wealthy. I rely on getting the mortgage interest reduction every year. You say the price of homes will go down? What about those of us who already purchased our homes? Our mortgage rates won't go down. The government needs to look at other ways to reduce the deficit and raising taxes is not the way to go. Maybe all federal employees at the very top levels should take a huge pay cut, move to smaller, less expensive homes or got back to renting an apartment, drive cheaper cars (and give up their cars and chauffeurs) and become the middle class. Then we might be seeing a different attitude and different resolutions. By the way, let all new Presidents and first families start using the expensive china that is already in the White House. Why are we paying for a new set every time there's a new President? Do they really need Air Force 1? Let them take a normal airplane like everyone else...in coach.

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