Still No Justification for the Mortgage Interest Deduction

If you want less of something, stop subsidizing it. And if you need more of something, stop giving it away.

These seem like basic truths, but after a crisis caused by too much mortgage debt and a deficit blown open in large part by sinking tax revenue, it's amazing to see the persistence of arguments for keeping the mortgage interest tax deduction.

The deductibility of mortgage interest will lower tax revenue by $1.4 trillion over the next decade. There's a raucous debate over what to call that money. Some say it's nothing; tax deductions don't "cost" the government anything, they say. Others call these laws "spending in the tax code," or "tax expenditures." It's easy to see why. If, instead of a tax deduction, the government wrote homeowners a check for 30% (or whatever your tax rate is) of the amount paid in mortgage interest, the effect on deficits would be exactly the same. One is a tax deduction, the other is a cash subsidy, but in practice they're nearly indistinguishable.

At any rate, you don't even have to be in favor of higher tax rates to favor chucking the mortgage interest deduction. Getting rid of it could lower tax rates (more on that in second).

The real insanity of the deduction is what it incentivizes. The origin of the deduction -- and its strengthening in 1986 -- lies in promoting homeownership, but its success here is dubious. Homeownership rates in the U.S. are on par with those of Canada, Australia, and England -- none of whom allow mortgage interest deduction. A study by the London School of Economics and Kansas State University found the deduction "has no statistically significant impact on homeownership attainment." Most of those who own a home would do so without a subsidy.

What the deduction has done is nothing to feel good about. A study cited in a Brandeis University paper reckons the deduction keeps home prices about 10% higher than they otherwise would be. The National Association of Realtors, a fierce proponent of the deduction, claims its elimination would cause home prices to fall 15% -- implying, if only by accident, that it inflates prices by an even larger amount. The NAR goes on: Killing the deduction "means about a $20,000 to $30,000 reduction in housing equity for a typical homeowner." That, or it made you overpay by $20,000 to $30,000 in the first place.

Before 1986, when the deduction took its current form, between 65% and 70% of nationwide home values were backed by equity, with the rest financed by debt (a home worth $100,000 had, on average, a $30,000 mortgage). That debt-averse attitude changed in the late 1980s and plunged throughout the 1990s and 2000s. By 2005, equity backed less than 55% of home values. Mortgages became the rage, and the deductibility of interest no doubt played a role. A recent Fannie Mae survey found that tax advantages of having a mortgage are nearly as important to homeowners as the sense of community that comes with homeownership.

The standard rebuttal here is that the mortgage interest deduction provides middle-class tax relief. But this is arguable at best. Only those who itemize deductions gain anything from the mortgage interest deduction -- a qualifier that applies to just 54% of those with mortgages. For those who do qualify, the deduction is skewed overwhelmingly toward higher incomes. For those in the 50th income percentile, the average annual benefit from the mortgage interest deduction is $215; for those in the 99th percentile, it's $5,393. Renters and those without a mortgage subsidize the leverage of a primarily well-heeled group -- and the more debt, the better. Some policy.

But again, nixing the mortgage interest deduction doesn't necessarily mean higher tax rates. It can be quite the opposite. In 1986, President Ronald Reagan's Tax Reform Act lowered marginal tax rates and paid for it in part by eliminating several deductions -- including interest on most personal debt (except mortgages, where the deduction was strengthened). There are calls today to move in the same direction. Last fall, the bipartisan chairmen of President Barack Obama's deficit reduction committee proposed eliminating most tax deductions (including mortgage interest), but lowering marginal tax rates from today's high of 35% down to 23%.

What would we get for this? Tax rates would come down and become more competitive worldwide. With a broader tax base, deficits would shrink by more than $1 trillion over a decade. Home prices would become more affordable. The incentive to go hog wild in debt would disappear. It's a win on nearly every count.

What do you think?

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

Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. Follow him on Twitter @TMFHousel.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 July 26, 2011, at 11:59 AM, muddlinthrough wrote:

    "If you want less of something, stop subsidizing it. And if you need more of something, stop giving it away."

    Uhhhh...sort of like healthcare, roads, postal services, prison unions, teacher unions, foreign aid?

    Your argument is specious, Morgan. People don't buy houses for the mortgage deduction. But, it does help take the sting out of being taxed at 9%, living in California.

    "With a broader tax base, deficits would shrink by more than $1 trillion over a decade."

    You lose credibility playing this dodge. The deficit the first year would be reduced by $100B, if we enacted a draconian, across-the-board chop.' Otherwise, it's funny numbers and you know it. Clinton brought out economic dishonesty claiming to 'balance the budget.' No, he had a balanced-annual-spending plan. The total economic debt still increased because the TOTAL deficit was still being rolled over at minimum payments.

    Eight years later after the Clintonian miracle of 'economic recovery,' Bush used those same ten-year projections from two years of bubble-fueled 'income' to the federal government to pass tax cuts (not a bad thing), rachet up spending to pay for unfunded Medicare, Medicaid, farm and military buy-offs to every vested interest in Washington--the farm lobby, the military contractors, the seniors, and especially Wall Street, as capital gains were cut to 15%.

    Who could lose? The Chinese were buying T-bills like crazy along with taking over and subsuming all of the world's manufacturing.

    Well, us. The US. It would only take a matter of time.

    As a middle-class worker-bee with a 401(k), some outside investments, and a house that I can continually sink money into as an 'investment' as well as the privilege of paying property taxes that buy ever-dimiinishing-in-quality roads, schools, fire and police services locally--sure, take away the federal balm of the mortgage deduction.

    Certainly, there are pros and cons to raising taxes. But as the chestnut goes, it depends on whose ox is getting gored.

  • Report this Comment On July 26, 2011, at 12:05 PM, JeanDavid wrote:

    I think the government should try a repal of the mortgage tax deduction. I imagine the main effect would be that housing prices would go down slightly, the amount of net tax reduction to home buyers. If they were rational. Less if they were not.

    Think of it this way. If the the cost of the house were so high that the deduction made the difference between buying or not, there would be somewhat less potential buyers. Because of supply and demand, sellers would have to lower the selling price to move the properties. So the purchasers would not really be much worse off. Now the prices would not come down quite as much as the deduction, since the very rich would not care one way or the other. But the poor or working class might well be just as well off.

    If the government were to try this for a few years, they could actually find out how much my assumptions need to be adjusted. Home ownership, I guess, would be about the same, but the prices a little less. And government revenue would be more. They do not need to argue about this. Try it for a few years and find out.

  • Report this Comment On July 26, 2011, at 12:05 PM, TMFHousel wrote:

    <Uhhhh...sort of like healthcare, roads, postal services, prison unions, teacher unions, foreign aid?>>

    For the most part, yes.

    Total debt under Clinton's later years increased because surplussed from SS are rolled into newly issued treasury securities. Debt held by the public decreased.

  • Report this Comment On July 26, 2011, at 12:08 PM, TMFHousel wrote:

    ^ Pardon all typos.

  • Report this Comment On July 26, 2011, at 12:14 PM, TMFHousel wrote:

    <<Your argument is specious, Morgan. People don't buy houses for the mortgage deduction>>

    This is exactly what the article says -- that the deduction does not influence home ownership.

  • Report this Comment On July 26, 2011, at 12:35 PM, TheDumbMoney wrote:

    I think the probable best solution is to end the duduction for future purchases, while maintaining it for those who already own. That would not pull the yearly-income rug out from under those who relied on this. This would not be as unfair as it at first seems, because such a change would also prevent these present owners from retaining the benefits of artificially-inflated home values when they eventually sell. So they would lose some signficant home value, but they would not have their yearly income streams retrospectively clipped. As sales occured over a period of a decade or two, the deduction would eventually "run-off". Alternatively, one could phase it down over a period of years. Those seem like the most reasonable middle ground positions to me. Just ending it now would be bad for the economy as a whole, and would hurt even those serial renters who long to stick it to the teat-sucking homeowners. Though I agree it likely serves very little economic good, in aggregate.

  • Report this Comment On July 26, 2011, at 3:07 PM, michaellovesnyc wrote:

    Agreed BUT this should have been done in 1999-2003 when there was the bubble and not now when homeowners are on life support. But I am a free market advocate and for the benefit of society and the free market I would support this; under one condition: that ALL other subsidies get eliminated direct and indirect. No section 8 housing. No public housing. No Rent control. No "rent stabilization". No welfare. No public schools/libraries. Why stop there ? No ethanol subsidies. No FDA/OSHA/ No minimum wage. No foreign aid/foreign wars. Lets go on; no more social security, no more medicaid/medicare. No more restrictions on foreign doctors and nurses. No more post office. ALL of these raise prices artificially. I would be more than happy to lose value in my house if the rest of the laws were equally pro-free market. I, and every other working American would be net-gainers. Otherwise, like everyone else, why should I give up my subsidy and let other people keep theirs ?

  • Report this Comment On July 26, 2011, at 3:08 PM, muddlinthrough wrote:

    Apologies:

    <At any rate, you don't even have to be in favor of higher tax rates to favor chucking the mortgage interest deduction. Getting rid of it could lower tax rates (more on that in second).>

    This is the part of the argument that's specious.

    I goofed with 'people DON'T buy' because I know three folks that *did* buy a house as a SINK (single income, no kids). They looked at what was going out the door in taxes on the cash income in the early to-mid-1990's and did the math and decided the mortgage deduction made sense because it somewhat offset or outranked the property tax hit VS renting and opportunity cost of tying up significant equity in a non-mobile asset.

    This thinking made sense before the real estate bubble--more cash retained because of a subsidy. What gripes me is living in California, the state tax can be up to 9% if you're moderately successful. The government has a program known as 'Alternative Minimum Tax' that was originally designed only to capture loophole scofflaws. It now reaches 4% of the population and grows. The joy of living in a high-state tax state? 7x more likely to pay AMT. And...wait for it, the AMT reduces or discards many of the deductions, so you can end up paying taxes on money you didn't even make.

    Sure. Let's eliminate subsidies I can take, because, well, I've got more money than a homeless guy. Let's keep beefing up the tax revenues, because, as Arnie learned, when you've got a $90B revenue to the state of California, and a $15B revenue, it's an easy way to get elected after Gray Davis irritated both sides for being too much of a middle-ground guy.

    Fast forward 8 years, and...viola. Revenue to the state is at $113B...and the budget gap is still $15-$20B.

    Please, please explain it to me how feeding the beast more food is getting me better roads, postal services, healthcare...and how you're going to back up the 'we decrease the budget deficit by $1T!'

    The TARP bailout was for $800B. Why? Because they admittedly had no CLUE how bad it was going to be, what it would take to stabilize the hemorrage of faith, but they knew Congress and the sitting POTUS would balk at a $1T request. As it was, $400B was used. So, the *new* POTUS requested the monies be released for stimulus...to be spent to get back that mythical 'each dollar spent by the government generates $2-$3 in the economy.'

    So, somehow, we should have had an additional $800B to $1.2T growth of GDP. Uhm...sure. The current paralysis over protected subsidies is showing how thin the curtain is over the graft in Washington, and how rich the pie and how little is going to be shared to the unconnected. I make you a prediction: the AMT will continue to 'grab' a higher and higher percentage of the 'rich' (those making 4x-6x times the poverty level of $30K/year). And $30K isn't officially the level, but below that, and it's hand-to-mouth for the most part. The mortgage deduction will be eliminated, as it's an easy target. And the deficit talks in two years will be about raising the ceiling to $20T. Obama's and Boner are together working at running about $4T/year increases, so by 2012, $14T will seem like a distant, fond memory. At some point, the $60T-$80T obligations will start compounding in.

    But, hey, controlling spending is never a government priority, either here or Nigeria. They're just more honest there--if you're connected to the top, you're wealthy. If you're not, you're just little people hoping you get crumbs to survive. Why should we be any better, any different, because we were at one time the USofA, leader of the free world and champion of the poor and downtrodden?

  • Report this Comment On July 26, 2011, at 3:10 PM, muddlinthrough wrote:

    oops:

    <state of California, and a $15B revenue *deficit*>

  • Report this Comment On July 26, 2011, at 4:46 PM, FutureMonkey wrote:

    I used to be an ardent supporter of the mortgage interest deduction, but I have come around to see things Morgan's way. The cost to taxpayers exceeds the benefit to taxpayers, the "incentive" is questionable. the mortgage interest deduction should go the way of the dodo bird (and this from a guy with a $708,000 loan at 5.25% in the upper quartile of income - so I'm not arguing from a position of protecting myself interest or giving up something I don't use).

    At a minimum the deduction should be limited to plain vanilla mortgages and only interest paid on the first $417,000 of loan for the primary residence (i.e no jumbos, second mortgages, and second homes). The benefit should be a flat 20% of the interest for all rather than variable based on tax bracket (i.e. 35% tax bracket gets a much larger benefit than the lower brackets).

    I'd take it a step further and eliminate all deductions, married, joint, separate. And go with a simple 1040 for every single person that just shows taxable income, gives one standard deduction, and spits out a number you owe. Be eliminating deductions we should be able to lower the marginal rate for all, maintain a progressive scale, with the goal of 20% of our population's taxable income. Payroll taxes stay pretty much the same, except no upper limit on salary.

  • Report this Comment On July 26, 2011, at 5:06 PM, clutch410 wrote:

    Do you really believe congress and the President would decrease our federal tax rates in exchange for the elimination of the mortgage interest deduction?!?

    Absolutely not!!!

    You can guarantee that they will see this as more income to spend on wasteful projects. Even if they did reduce the fed tax brackets the states will increase theirs because they're not receiving the same subsidy amounts anymore.

    I'm all for the elimination if ALL of the federal tax brackets take a huge dip but that won't happen. So let's keep the mortgage interest deduction for now. Maybe revisit the issue when this country is prosperous again.

  • Report this Comment On July 26, 2011, at 5:18 PM, Borbality wrote:

    Probably would need something to sweeten the deal for current homeowners if they're going to lose the interest deduction, or that'll just push them over the edge in deciding whether to walk away.

    So you'd get more people walking away, and bring prices down further. Not sure congress has the stomach for that. And I seriously doubt a democratic president and senate would lower the tax rate to get rid of the deductions.

    Of course, you can just eliminate the deduction for new buyers, and it might not hurt new sales all that much, since prices will go down even farther, but it will take a long time to see a big impact.

  • Report this Comment On July 26, 2011, at 5:22 PM, xetn wrote:

    There is stiill no justification for taxes. Taxes (legalized theft at the point of a gun) makes you a slave of the state. Theft is theft!

    Ok, fire away all you tax loving "investors". For how else will you pay for all those "free" government services? That is the point, there are no free services.

  • Report this Comment On July 26, 2011, at 5:24 PM, TMFHousel wrote:

    ^ To be fair, no one has ever pointed a gun at me while filing my taxes (to my knowledge).

  • Report this Comment On July 26, 2011, at 5:28 PM, xetn wrote:

    Then try not filing your taxes!

  • Report this Comment On July 26, 2011, at 5:46 PM, drborst wrote:

    @dummerthanfool: Nice point, Thank you. It is easy to say we should eliminate the deduction, but hard to figure out how to best make it happen.

    Morgan, you are usually so good with numbers that it hurts to point out your (small) mistake.

    >>If... the government wrote homeowners a check for 30% (or whatever your tax rate is) of the amount paid in mortgage interest, the effect on deficits would be exactly the same.<<

    That's only true for the 54% who take the deduction, it's not true for either the government or the 46% who don't (and I presume take the standard deduction)...

    And to tie those two items together, I'd suggest we turn the deduction into a credit that diminishes over something like 7 years. It makes it more progressive to start, and then removes the market distortion in an orderly fashion. The question neither dummerthanfool nor i address is the impact to state budgets.

  • Report this Comment On July 26, 2011, at 5:47 PM, whereaminow wrote:

    ROFL, Morgan, you really have to stop playing the "voluntary taxes" angle. If they were voluntary, they wouldn't be called taxes. That's what the word donation means. So you can either attempt to insert the word donation in lieu of taxation (and get laughed off the board) or stop playing this childish "I didn't see the gun" nonsense.

    Tax loopholes are politically created incentives that are exogenous to the market. Homeowners who base their buying decisions on tax loopholes like mortgage interest deductions are setting themselves up to be bamboozled later on when the loophole is closed to fund government's ever expanding desire to consume other people's resources. The same goes for retirement plans. Normal people without political connections need to be extremely careful when evaluating puchases that involve tax incentives, as they will surely not last forever.

    Finally, Morgan, since you have been a proponent of closing loopholes and raising taxes, I need to ask you a very serious question: how does an institution with a comparative advantage in the use of force and its very own printing press have so much trouble paying its bills?

    That's the trillion dollar question.

    David in Qatar

  • Report this Comment On July 26, 2011, at 5:51 PM, TMFHousel wrote:

    <<ROFL, Morgan, you really have to stop playing the "voluntary taxes" angle. >>

    I've never called taxes voluntary. Taxes are set by politicians who are elected by voters.

    <<Finally, Morgan, since you have been a proponent of closing loopholes and raising taxes>>

    I'm a proponent of closing loopholes and lowering marginal tax rates.

  • Report this Comment On July 26, 2011, at 6:02 PM, dgmennie wrote:

    People who want the mortgage interest deduction eliminated fall into one of three categories: (1) they live in a cardboard box or under a bridge someplace and desperately need more 'free' govenment services just to survive; (2) they rent (instead of own) their housing and have less opportunuity to reduce their taxable income than the guy next door (jealousy counts); or (3) they really expect that the government will use the additional tax money collected for the greater good and/or to lower everyone's taxes. (Those in 'category 3' also believe in the Tooth Fairy and the Great Pumpkin).

    The net result of any such tax law changes will be more burden on the US middle class. Meanwhile the rich, the super-rich, and the corporate elite already have plenty of ways to dodge the tax bullet, and are always busy procuring other methods (via lobbiests) to preserve their wealth. They have already exported your job to China and India. What will they be relieving you of next?

  • Report this Comment On July 26, 2011, at 6:02 PM, whereaminow wrote:

    <i>I've never called taxes voluntary. Taxes are set by politicians who are elected by voters. </i>

    So what? Politicians are very close to the lowest form of human life and have been since the dawn of government. The only reason we put up with the existence of political cretins is because the alternative might just be an iron fisted dictatorship. That's it. Nobody likes politicians except for the ever growing group of people that use politicians to confiscate other peope's resources and labor.

    What voters? What about gerry mandering, restricting access to ballots for third parties, black box voting machines, the long and rich tradition of vote fraud, and the always popular "say one thing to get elected, do another to get money to get re-elected for life."

    <i>I'm a proponent of closing loopholes and lowering marginal tax rates. </i>

    And I'm a proponent of Santa Claus stories, but the difference is that I know Santa Claus is just a story.

    I'm still confused, though. We've had 80 straight raises of the federal debt ceiling, and are currently suffering from pointless bickering over 81. This covers 71 years.

    So for at least 71 years, a government with a comparative advantage in force and a printing press has struggled to pay its bills. What is the explanation for this?

    David in Qatar

  • Report this Comment On July 26, 2011, at 6:28 PM, ershler wrote:

    xetn,

    I thought you might be going soft from some of your posts on other articles. Thanks for not letting me down.

    David,

    It took a lot of scrolling, I was getting worried I was wasting my time but you didn't dissappoint. I don't completely agree with you on the government having a comparative advantage in the use of force. There are numerous examples showing how non-conventional warfare can negate an opponents size & strength. I think anyone with average military training and intelligence could to more damage to the US government then vice versa.

  • Report this Comment On July 26, 2011, at 6:44 PM, WhidbeyIsland wrote:

    I've got some bad news for everybody.

  • Report this Comment On July 26, 2011, at 6:56 PM, stlmikey wrote:

    I agree that it's time to eliminate it. The most effective way to do that is to turn it into a 25% credit and then reduce that credit at 2.5% per year over 10 years.

    The negative impact in the first year is only on those in a tax bracket higher than 25%. And the credit will temporarily benefit those lower income individuals who do not itemize.

    This should allow an orderly transition in the housing market without having two classes of individuals like you would have if the elimination was prospective only.

    If we could lower tax rates in the process, that would be an added bonus.

  • Report this Comment On July 26, 2011, at 7:04 PM, easystreet70 wrote:

    "These seem like basic truths, but after a crisis caused by too much mortgage debt and a deficit blown open in large part by sinking tax revenue, it's amazing to see the persistence of arguments for keeping the mortgage interest tax deduction."

    i'm sure that you simply overlooked the out-of-control, insane, ignorant spending by our government. that needs to be fixed as well, no?

  • Report this Comment On July 26, 2011, at 7:08 PM, TMFHousel wrote:

    ^ Yes. But the article is about tax policy.

  • Report this Comment On July 26, 2011, at 7:14 PM, whereaminow wrote:

    ershler,

    Comparative advantage is not the same thing as absolute advantage :)

    Libertarians advocate a strict non-aggression principle, leaving us with only the option of withdrawal if education fails.

    David in Qatar

  • Report this Comment On July 26, 2011, at 7:16 PM, whereaminow wrote:

    I should qualify that, since some libertarians believe that they are able to defend themselves against state violence. I disagree, but it should be noted.

    David in Qatar

  • Report this Comment On July 26, 2011, at 7:26 PM, whereaminow wrote:

    This is fitting

    "Many writers denounce tax exemptions and levy their fire at the tax-exempt, particularly those instrumental in obtaining the exemptions for themselves....If a tax is in fact unjust, and some are exempt from it, the hue and cry should not be to extend the tax to everyone, but on the contrary to extend the exemption to everyone. " - Murray N. Rothbard, "Man, Economy, and State"

    Ok, sorry to fill up your article comments, Morgan. Thanks for the discussion.

    David in Qatar

  • Report this Comment On July 26, 2011, at 7:47 PM, maxmattnyc wrote:

    thank you for writing this article. the government should not be promoting debt – the only people who benefit are the banks, not the homeowner. eliminating this tax deduction as well as tightening rules for mortgage approval may cause a further drop in real estate value, but in the long run benefit al americans in a very real way by bringing real estate back to prices that reflect its real value.

  • Report this Comment On July 26, 2011, at 7:58 PM, Justify wrote:

    "People who want the mortgage interest deduction eliminated fall into one of three categories: (1) they live in a cardboard box or under a bridge someplace and desperately need more 'free' govenment services just to survive; (2) they rent (instead of own) their housing and have less opportunuity to reduce their taxable income than the guy next door (jealousy counts); or (3) they really expect that the government will use the additional tax money collected for the greater good and/or to lower everyone's taxes. (Those in 'category 3' also believe in the Tooth Fairy and the Great Pumpkin)."

    I own a home, with the exception of that $350K mortgage attached to it, and I believe it's quite possible to get rid of the mortgage deduction and lower tax rates, so I guess that puts me in category 3. Your categorization is both simplistic and false. As noted before, tax rates were lowered when the interest deduction was eliminated in 1986. As to dodging the tax bullet, I'll note that it's getting tougher for the rich, at least as far as putting their funds in offshore accounts.

    The Tooth Fairy

  • Report this Comment On July 26, 2011, at 8:11 PM, burningdaylight2 wrote:

    I run my rentals as close as possible to break even. A loss of interest deduction will lead to an increase in rent.

  • Report this Comment On July 26, 2011, at 9:00 PM, velcrosalsa wrote:

    If starting from scratch I would not favor the mortgage interest deduction since there is no need to incent people to buy a house. Shelter along with food and clothing are pretty basic human needs, so giving people a tax break for buying a house makes as much sense as providing tax incentives to buy clothes and food. What it did was make people able to afford to spend more on a house than they otherwise would have. I am not so sure what the impact would be of chaning the rules now, however, so am sure there would be some unexpected and unanticipated impacts of eliminating it now.

  • Report this Comment On July 26, 2011, at 9:03 PM, MichiganJeff wrote:

    @burningdaylight2... different deduction, at least in my opinion. You're talking about a business expense (mortgage interest) reducing business income (rent), even if you end up filing on your personal 1040. I doubt that deduction would go away as doing so would probably mean extending the same rules to companies that own and rent out properties, or at least it should.

    Not totally convinced about eliminating the deduction on primary residences, but I think it does make sense to do so on second homes. Those with two homes generally have the means to bear that reduction in deductions. There are always exceptions (eg, two homes while trying to sell the first, inheritances, etc) that might make the burden overbearing for some, but do we really need to subsidize the mortgage of someone's vacation condo along with their main home?

  • Report this Comment On July 26, 2011, at 9:04 PM, AsturiMan wrote:

    According to Hussein Obama and the Democrats I make too much money. Apparently $250k/yr and above is the baseline that makes me a capitalist pig. I get no tax break for having a child in college. Add in those expenses, plus mortgage, expenses running a home, long commutes to work, auto upkeep, etc., yes I think it bloody fair to keep the mortgage tax deduction. Socialism punishes those who succeed. The Democrats/Leftists are desperate to find more ways to tax and spend. Not every one is financially qualified to own a home. Why punish those who earned, saved, and have liquidity?

  • Report this Comment On July 26, 2011, at 10:16 PM, TomBooker wrote:

    Morgan, I hear ya. But let's get big, and grow up.

    Ya can never run new business over already existing bad business. It's all lipstick, no matter how much sense it makes.

    All of the national-wide asset busts since the 1980s have endured, except for Scandinavia. They did the original Bad Bank model without the massive monetary hocus-pocus.

    You put all of your dirty laundry on the table. It's gross, it stinks and everybody has to eat dirt and drink seawater for a while. But the real offenders take a bigger and longer nutrition adjustment.

    Nothing, including the culture, can heal until you get rid of the ghost assets.

    Everybody has the fancy discussion, sophisticated to the point of a conceit, regarding Japan. But to this day, Japan suffers because there is still doubt in the system and "value" as a concept. By the time they really started facing up to the assets (15 yrs), the country had been sick with poison assets for too long and was too weak to take on the weight of the cleaning.

    Another myth is that nothing can be done for the Household balance sheet. Have another cup of Heritage punch.

    Adam Smith himself would call for the roll-back of the Feudal System Landrenter personal bankruptcy addenda. We own everything we have. If some dumb schmuck gets a little bump for being stupid, I have no envy. I don't need "more" or more than I deserve. Because when a just system cleans up, degrees of busted don't exist. There is just busted, and you go on from there.

    tick..tick...tick...tick Every tick now costs 2 or 3 ticks later, and all of the painful time we wait.

    What we can't see is that we're to the point where the soonest justice is the best mercy. And any further hopes of some better "soft-landing" are delusion. This is the shortest fall to the ground we're gonna get. It only becomes a farther drop from here, and worn-out, we won't stand the fall.

    Time to wet out the fire, and call the dogs in. The hunt is over.

    Everybody bring in what they got, and we'll count it all up.

    We have no chance of being Better People, until we're honest men, first.

    It's nothing fancy...

    it's called Accounting... named so for a whole lot of reasons. And in this case, for men's souls, too.

    From a friend...

    1. Force all banks to mark all their assets to market at the end of each trading day, including all derivatives of all types, including over-the-counter instruments.

    2. Allow citizens to discharge all mortgage and student loan debt in bankruptcy court, just like any other debt.

    3. Banks must mark all their real estate to market weekly as defined by "last sales of nearby properties" adjusted for square footage and other quantifiable measures (i.e. like Zillow.com).

    4. Require mortgage servicers and all owners of mortgage-backed securities to mark every asset within each pool to market weekly.

    5. Any mortgage, loan or note which was fraudulently originated, packaged and sold, including the misrepresentation of risk, the manipulation of risk ratings, fraudulent documentation by any party, etc., will be discharged as uncollectable and the full value wiped off the books and title records without recourse by any of the parties.

    If a bank fraudulently originated a mortgage and the buyer misrepresented material facts on the mortgage documents, then both parties lose all claim to the note and the underlying asset, the house, which reverts to the FDIC for liquidation, with the proceeds going towards creditors' claims against the bank.

    6. Any bank which misrepresents marked-to-market asset values will be fined $10 million per incident.

    7. Any bank which is insolvent at the end of a trading day will be closed and taken over by the FDIC the following day, and liquidated in an orderly manner via open-market auctions of all assets, including REO (real estate owned).

    8. All derivative positions held by the insolvent bank will be unwound immediately, and counterparties who fail to make good on their claims will also be closed, given to the FDIC and liquidated.

  • Report this Comment On July 27, 2011, at 6:43 AM, Bert31 wrote:

    "The deductibility of mortgage interest will lower tax revenue by $1.4 trillion over the next decade."

    Well then maybe they should not spend that "revenue"?

  • Report this Comment On July 27, 2011, at 6:54 AM, skypilot2005 wrote:

    If the mortgage interest deduction is ended, we should have lower tax rates in exchange and the deduction should be grandfathered for those who expected and planned on it

  • Report this Comment On July 27, 2011, at 8:40 AM, CaddyKen wrote:

    Good opinion piece- generated a lot of Buzz.

    While I am a beneficiary, I tend to agree with Morgan that we should abolish the deduction as it encourages bad behavior. Our unhealthy use of debt is pervasive throughout our government and the populace.

    I think that while most people do not buy a home to "get a deduction" people are encouraged to buy "more home" than they need/ can afford because of the "deduction".

    I put deduction in quotes as personally I do not see the advantage in paying the bank a dollar in interest to get a quarter back in taxes.

    Bubbles in markets are typically driven by artificial forces disturbing the natural equilibrium. A change such as this would be impactful in the short term, (home sales would drop for a while longer and the unemployment that goes with it) but well worth it in the longer term.

  • Report this Comment On July 27, 2011, at 8:56 AM, TigerPack1 wrote:

    The Good News: Wages are rising almost 3% annually... http://finance.yahoo.com/news/Employee-pay-set-to-rise-3-in-...

    The Bad News: Inflation is 6% and rising annually, and health care insurance premiums are rising 2% yearly for workers... www.shadowstats.com

    So your net PAY CUT will ONLY be -5% this YEAR! Don’t worry though, BEN’s inflation expansion plan is making the RICH, RICHER each year with a skyrocketing stock market and supporting the high pay of business executives and bank presidents.

    Then Uncle Sam will raise tax rates, and cut loopholes for the middle class in the 2012 budget about to be announced. YEAH!

  • Report this Comment On July 27, 2011, at 9:19 AM, TaxThenToDeath wrote:

    Yeah Right, the Federal Govt. is really going to cut taxes across the board, if the mortgage interest rate deduction is eliminated.

    And I have a bridge I want to sell you!

  • Report this Comment On July 27, 2011, at 10:06 AM, kwl1763 wrote:

    Agree with most, theory good, timing bad.

    I don't think you want to introduce this during a time when housing prices are still coming down and the market most likely still has a few years to even stabilize. When that happens you can think about it, there is no doubt it will negatively affect housing prices.

    I think a more logical route might be to limit the deduction to say $10k annually. This would let the vast majority of Americans still deduct the full amount and still encourage widespread home ownership but would be a sort of luxury tax if you choose to live in a McMansion.

  • Report this Comment On July 27, 2011, at 11:13 AM, ikkyu2 wrote:

    Folks - really rich folks like Warren Buffett - have been calling for the abolition of the mortgage tax break for some time. If you want something - homeownership - try incentivizing it, sure. But we don't want an ownership society, apparently; we need more month-to-month wage slaves to collect a paycheck and spend it on rent, and what's left over at Wal-Mart.

    More broadly, I'm about as conservative as they come, but I leveraged up to buy a home with a large mortgage because the rules of the game say that's the incentivized behavior. If the mortgage tax break went away tomorrow, I don't think I could keep my house. Pretty sure I couldn't sell it either, as the house becomes significantly less attractive to buyers if the mortgage interest isn't deductible.

    It's not just I who'd be in trouble; most homeowners nationwide would be. Foreclosures and defaults would skyrocket and home prices would drill a hole in the floor as they dropped in free fall. That $1.4 T in tax revenue wouldn't get collected because taxpayers, as a whole, would suddenly get collectively poorer.

    Having trouble seeing how this benefits anyone.

  • Report this Comment On July 27, 2011, at 11:34 AM, astuber9 wrote:

    Most of your policy suggestions make a lot of sense and are actually feasible considering what Congress is willing to do/what they could actually accomplish. But this one makes no sense, there is approximately a 0% chance they would take away the mortgage interest deduction. With the housing situation as it is, I think Congress would reduce spending on Medicare/SS (still very unlikely) before they remove the interest deduction.

  • Report this Comment On July 27, 2011, at 11:45 AM, Brent2223 wrote:

    This is a great example of how unecessarily complicated income tax regimes can be. This spawns a whole non value add industry of lawyers and financial planners whose sole purpose is to find ways to minimize the amount of taxes paid. And as these services are more available for the weathly, the breaks end up getting subsidized by the working class. Simplify income taxes by getting ride of the volumes of complicated deductions, surtaxes, etc., and move more towards a simple point of sale commodity tax regime which is something we can all understand and would be much less prone to manipulation. There is no need to make things this complicated.

  • Report this Comment On July 27, 2011, at 12:58 PM, DuG37 wrote:

    The issue here is that we have a government that was borrowing when it should have been saving and is now borrowing to be able to keep borrowing. At some point it is unsustainable and Congress is just starting to wake up about 30 years too late.

    I will agree with the premise that the Mortgage Deduction helps those in good financial situations more than those in bad ones. What it also does is help create real wealth. Unlike almost everything else purchased via loan a house creates actual wealth. This is a good thing for most homeowners (who don't get irresponsible with too much of a mortgage or "cashing out equity"). This deduction helps those with the least capital the most as most people would not take a mortgage if they could buy their home in cash. This helps families (and individuals) have something of their own and if done responsibly it is better for people to own homes than to rent.

    What I have read as a possibility that needs to be done immediately is putting a cap on the deduction (I dont remember the specifics but a mortgage value of $500,000 or less which only limits the high end is practical) and limiting the deduction to only the primary home, which honestly it is appalling that second homes were ever included.

    This is just one piece of a very difficult puzzle to put together (I would say some pieces are still missing) to get our nation out from the ridiculous debt that the economy is propped up on. The Federal government needs to use every means necessary to stop borrowing and to pay down the principal debt (instead of rolling it over and over and over and over)...

    One big piece that is being neglected is a federal sales tax. Hard to get a true number but from what I can gather $4.1Trillion dollars are spent is the US annually (give or take a few hundred Billion), with only a 1% increase which most people would notice but wouldn't care about (except maybe purchases over $1,000) that would bring in $40B annually and since the infrastructure is already there in 45 of the 50 states it would be a low cost option that should more than pay itself back in the first year. Of course as someone who finances are 100% income based I would love to see the income tax and all of the ridiculous loop-holes, deductions, corporate incentives & subsidies repealed and replaced with a national sales tax that encompases all expendetures in the US and all imports to the US. This would be damaging as an entire industry (Tax) would be destroyed and would hurt those who don't have earned incomes (mostly the wealthy and the retired). But since that would be drastic (but fair and transparent 2 things Congress are scared to death of) at least by creating a small, but meaningful federal sales tax, the infrastructure is there to allow for a change to perhaps have a small flat income tax (KISS) with no deductions and a more significant federal sales tax that would impact everyone equally and bring in money from all of the foreign tourists who come to take advantage of favorable exchange rates with the Euro and Pound (and soon every other major currency).

  • Report this Comment On July 27, 2011, at 1:06 PM, 11x wrote:

    How many people do you know that have high income, that CHOOSE to rent? Most people know the pros/cons of home ownership, and despite the recent bubble, home ownership is a way to build equity over the long term. Owning a home is favorable. Generally, if you can afford a home, you buy one. If you cannot afford a home, you rent. You should not need an additional incentive in the form of interest deductions to buy a house. So to me, the mortgage deduction is simply giving people that can afford a home another tax credit to do something they would do anyways, and leave those who cannot afford a home without such credit... there is no "credit" for renting because you cannot afford a home.

    Why don't we give gax credits for being handsome while we're at it? Or give credits for being wealthy because we want Americans to be wealthy?

  • Report this Comment On July 27, 2011, at 1:46 PM, acssgt316 wrote:

    Perhaps it is time for an alternative to income tax. I have heard a few decent arguments for a national sales tax vs income tax.

  • Report this Comment On July 27, 2011, at 8:56 PM, slpmn wrote:

    What I find interesting is the note "A study by the London School of Economics and Kansas State University found the deduction "has no statistically significant impact on homeownership attainment."

    Let's think about that for a minute. To economists and Republicans, the belief that people respond to monetary incentives like Pavlov's dog is gospel. It's the foundation of their respective religions and explains all they need to know about how the world operates. It justifies everything from 8 figure CEO paydays to why unemployment checks are bad to why if you raise the max rate from 35% to 37% or tax hedge fund manager income at ordinary income tax rates the economy will collapse.

    But wait a minute. Here we have a simple example of how giving people a significant monetary incentive to buy a house doesn't make them more likely to buy a house! Turns out they were going to do it anyway. Hmmm. Maybe the CEO would have still worked hard for $1 million/year instead of $20 million, and the unemployed guy would still be unemployed even if he didn't get paid, or maybe he still would have gotten a job even though he could have been paid for doing nothing. Maybe paying 37% on your income won't change an damn thing compared with when you paid 35% (or if it dropped to 33%). The point is, decisions are driven by far, far more than the marginal dollar cost of doing or not doing.

    In the meantime, our country has some bills to pay. Can we please get on with it?

  • Report this Comment On July 27, 2011, at 11:45 PM, ershler wrote:

    David,

    You are going to have to explain to me how comparative and absolute advantage relate in this case.

  • Report this Comment On July 28, 2011, at 12:11 AM, Hookem2011 wrote:

    Instead of just talking about this deduction, let's get rid of all of them!!! Then the overall tax rate for everyone would come down the most. Unless we do that, there will continually be the debate on which one to keep and which to end. If you do not want the government to subsidize mortgage payments, then why do you want it to subsidize corn, ethanol, business luncheons, corporate retreats, charities, etc. Let the decision to do something would be based on it's real value.

  • Report this Comment On July 28, 2011, at 12:35 AM, muddlinthrough wrote:

    slpmn: <In the meantime, our country has some bills to pay. Can we please get on with it?>

    The current debt-limit discussions show neither side is interested in paying the debt down. The POTUS is in charge of wealth-distribution, as he argued *during the campaign* that those that have more will have to pay more. Some studies I've read bring that to the $40K range will have increased taxes.

    What WOULD pay some bills is to have a common WTO agreement among the G20 that any company incorporated within their tax structures could be taxed at a flat 25% rate, and a 5% per-annum 'cash tax,' (consider it a negative-interest-payment relationship) for monies held 'overseas.' That would bring in considerable revenue from the Fortunate 500 who get significant benefit for paying extremely high salaries to bright-minded folks to do nothing but think how to bend a rule until its useless.

    This would have an added benefit of increasing shareholder dividends for 'bigger fool' companies like Apple that do nothing but hoard income rather than pay taxes. They'd have the choice of giving more to those who buy the stock (incentive) and drive up the price that way, rather than demanding 'tax holidays' so they can bring it back to the US for stock-repurchases (benefitting the CEO & executives) rather than the individual shareholders or institutions.

    Which do you think Congress will go for? Something like that proposal, or a cut in services and an increase in individual taxes by increasing the AMT capture rate by making more eligible to pay that and decreasing or eliminating the mortgage deduction? The tax holiday will happen...for the corporations. And no bills will be paid from it.

    The debt-limit will be raised, and raised again...and the marginal tax rates won't go down for those that were shafted by the loss of the deduction.

    Them's the Hobson's choices and Occam's Razor analysis. There's no political will to do the right thing--Obama doesn't have the spine to be leftist enough to spend us into oblivion as his core bread and circuses supporters (a la Krugman and Tom Tomorrow) would have him be. He's not strong enough to make the conservative, rational (not libertarian) fixes that solving the system's problems would take. He's no Newt Gingrich...he understands there are budget-deficit problems...but his solution so far has been to argue that somehow healthcare was this vampire that was sucking the economy dry. Ergo, open it up to everyone, and give employers the option to pay a penalty if they won't provide it, and remove the tax break for providing it.

    Shocking--they'll pay the hickey of the penalty. Because the numbers don't work out that giving away healthcare to anyone, much less anyone, makes sense. So, Medicare and Medicaid costs increase, as more are dumped into the choice of last resort. Another bill that will have to be borrowed for to pay...increase the debt limit again, please.

    Defense is off the table for budget cutting--its non-discretionary. And it's the biggest suck on the GDP. All-hail the military industrial complex. As long as we have better bombers and a few nukes, the creditor nations we've been dumping funny money on top of won't show up in person to collect. Let's borrow so more so we can be the world's cop. How's that Libyan peace-keeping mission going, anyways? Excuse me, Sir, on that debt-limit-raise thing...may I have another?

    Forbes promoted a flat tax. Failure. Perot promoted paying off the debt, that 'crazy aunt in the attic.' She's no longer in the attic, she's in the front parlor, with an axe and two bottles of scotch in the other hand, bloomers half off, topless, and singing songs Uncle Henry brought back from the trenches around Verdun.

    Gingrich and co. promoted shutting down Clinton's spendthrift ways and in his fifth and sixth years, the economy stabilized (China got MFN, started buying more T-bills with the money that they were getting selling Bill Walton cheap crap at WalMart and pretty much undercutting any craftsmanship quality tool or good with inferior but 'good enough for one or two years' junk. Enter a tech bubble, Y2K and easy credit and suddenly an economic miracle occurs. Except in the tiger countries, which suddenly almost crash but don't in 1998. Just in time for a new president to get stuck in 2000 with the tech bubble collapse.

    But, thanks to the repeal of Glass-Stegall and a housing policy that no longer can look at actual wealth, employability, history, or anything else that smacks of racist or redlining or even common sense lending, there's a new bubble to be inflated by those bright johnnies in the banking industries.

    Sure, we should pay our obligations. Or, we can devalue the dollar (Clinton got away with it to the tune of 60% from 1992 to 1997). Or, we could do the hard thing and default, and clear the decks. It worked for Greece, it's working for Ireland.

    Either we have the economic engine to survive that, or we don't. We will eventually have to do so, because as Perot's charts proved in 1992, there's a breakover point where you can't pay it back.

    We're there. We won't. And getting rid of a minor annoyance like the AMT being an irrational but necessary-to-some-folks subsidy won't pay the bills. It wouldn't even be a good start, because as the debt-limit increases show (and they're getting closer-and-closer-together...because of that required interest payment on the total federal debt), there IS no bill-paying going on. It's just band-aiding while them-that's-got-it shovel it off to Switzerland or other locales.

  • Report this Comment On July 28, 2011, at 1:34 AM, muddlinthrough wrote:

    <But wait a minute. Here we have a simple example of how giving people a significant monetary incentive to buy a house doesn't make them more likely to buy a house! Turns out they were going to do it anyway.>

    Garbage argument. Also on the 'why should it be allowed on a 2nd residence?' A bit more on that after the first refutation.

    I know personally three friends who were single, no-kids (e.g., no deductions) who bought houses because of the additional tax break. They in some sense were smarter than I was; I was content to pay for the mobilty privilege renting provided.

    Now that I think about it, the number's higher for those that bought because of the tax break + equity...but my peer group then was high-earning single or DINKs techies in Austin, Phoenix, and the Bay Area. But this was in the mid-to-late 90s, when home equity was supposedly a guaranteed value-bank.

    Now that I'm one of those making use of the deduction (married someone who bought for that reason, so I'm at 4 'so incentivized' as a SINK, the DINKS push the total to 7)...and did a HUGE gulp on the adding my name to the mortgage and deed.

    Marriage, that's for life. A thirty-year-mortgage...who's insane enough to plan to be in one location for that long of a time???), it's not a necessity. But, it does help. And as those hiccoughs called life happen, if the deduction goes away, it will probably affect my status as an owner, a reluctant landlord, and it will definitely affect the decision making to stay in those groups, by choice. When an owned item goes from perceived asset to liability, its value almost always drops.

    But I'm still not understanding why I'm supposed to pay taxes for unemployment, disability, SS, SSI, FICA, CA state tax which will also tax the money I get refunded on the taxes I paid the Feds, a retirement (SS) which I'm told will be insolvent before I get there even though my employer is paying an equivalent share of what I'm kicking in, property taxes that eat up the majority of the benefit of the tax write-off of the house.

    Sure, removing the deduction will sting, but I should be proud to pay it, right? And on that house that I'm now renting out after needing to relocate due to tech jobs moving to China and India? That interest deduction will allow me to send another couple of thosand towards Washingon...that'll no doubt go towards paying for the debt acquired by the USG when Ms. Pelosi chartered a ride home to SF for her and her posse and her body guards and the body guards' body guards on the week-end. Glad I could help.

    Yah...the former castle, now rental house is about break-even, not quite, once I factor in the ppty mgmt company cost (deductible), on-going mortage on that and the new house (not deductible), property taxes (not deductible) on both the old and the new (not sure what they're buying me...the roads are pot-holed and are on average repaved once in 100 years, from a SacBee study a few years back...schools continually getting worse and worse ratings.

    Police and fire services were cut 30% between 2004 and 2007, if I remember another article correctly, in my city tax district during that window, because monies were being siphoned to the state coffers to pay for the state budget gap.

    But who needs cops or fire protection services? So, the city voted an additional tax increase a couple of years running, just in time for revenue to take a bigger hit because of the bubble bursting in RE ownership. California has been living the debt-ceiling crisis since 2001, at least, for anyone paying attention. More taxes don't seem to have fixed the problem. Prop 13 didn't kill the tax-rate problem, it just helped the large businesses not pay the tax. The fees and services charges were moved to Mello-Roos, so one can't blame 'lower taxes threw California into its spending/debt crisis.'

    Sure...eliminate the interest deduction, Morgan. I'm sure that the trickle-down-reduced-taxation will catch up with me somewhere.

  • Report this Comment On July 28, 2011, at 10:33 AM, slpmn wrote:

    muddlinthrough - Lot's of grievances, many of which I share, but I have to ask - What's your point?

  • Report this Comment On July 28, 2011, at 12:01 PM, ByrneShill wrote:

    What I really wonder is why Quatarites don't expect their David to work? Is Quatar some kind of tax-free heaven where nobody has to work for a living?

  • Report this Comment On July 28, 2011, at 1:16 PM, motcal wrote:

    The deduction is necessary in California. It's the most significant middle class tax break. Mortgages are a lot higher here with many in the $500k to $2million range so any reduction will have significant impacts on net incomes and probably property values. As an accountant I see hundreds of homeowners who itemize deductions.. Many homeowners, myself included, have planned on the deduction when getting the mortgage. An Interest Only mortgage has a LOT of deduction relative to a 30 year fixed. There are a lot of Interest Only mortgages and the owners are NOT speculators. I've written my Calif. representatives to oppose mortgage interest deduction reductions.

  • Report this Comment On July 28, 2011, at 4:09 PM, aldousworp wrote:

    My objection to the mortgage interest deduction has always been that it is sold as a benefit for the middle class. It has always been much more usefull to the highest paid people. It has been largely responsible for the average home growing from 1100 square feet to more than twice that in the last 30 years or so. At the same time the average family living in the home has shrunk from four or five or more down to one to three. Do we really need four times the house per person that our parents had? I don't know how to ween us off this subsidy while we're in the middle of a housing bust. It's considered an intitlement. It would be a lot better for everyone if it had never been created. Government interference in the marketplace is one of the leading causes of bubbles and crashes.

  • Report this Comment On July 28, 2011, at 4:32 PM, kkconway wrote:

    "muddlinthrough", I'm surprised you know the word "specious", because you don't know what you are talking about, unless it's to obfuscate the argument in defense of your petty person benefit, i.e., the discount on your own taxes, over against the real benefits which all citizens would share be eliminating all inefficient government policies, which definitely includes the mortgage tax credit. I'm in favor of sending you a hefty tax rebate if you will shut up and vote, without making a fuss about your two bit NIMBY crud.

  • Report this Comment On July 28, 2011, at 5:41 PM, ilovesumm wrote:

    Maybe look at a defense cut before mortgage deduction.

  • Report this Comment On July 29, 2011, at 11:31 AM, djangophile wrote:

    So often our attempts to "incentivize" some action ends up as a loophole that distorts a market. We all end up fighting with each other because it doesn't seem fair that certain people have learned to game the system.

    If you really want to encourage people to carry debt, it a good plan. If the intent was to help lower income families buy into the American Dream, maybe it is not serving its purpose.

  • Report this Comment On July 29, 2011, at 11:54 AM, Rustamon wrote:

    Forgive me if this has been mentioned but it probably bears repeating. The problem here would be how to transition back to an environment with no mortgage deduction. Many existing homeowners would have severe cash flow problems if their effective mortgage payments were increased by ~30%. This would likely set off another wave of defaults. Second, for those who can carry the load, it still would represent a one time, significant, downward reduction in their homeowners equity as market prices adjust down. Those who plan to sell only to upgrade to another, larger home may be indifferent as all prices have come down, but those looking to sell and downsize (say to pay for college or retirement) will be left with far fewer resources than they had planned.

  • Report this Comment On July 29, 2011, at 12:01 PM, ChrisBern wrote:

    Great article Morgan. It's a relatively inarguable point in my opinion--I haven't seen any good reasons to subsidize housing interest and your article summarizes this perfect.

  • Report this Comment On July 29, 2011, at 12:27 PM, skepticmba wrote:

    It's not fair to change the rules in the middle of the game. For most home owners, the mortgage interest deduction was a material consideration in deciding between owning and renting. To remove that after the fact, especially now that so many families are struggling to keep their homes, would not only be grossly unfair but would result in a lot more loss than NAR claims. If there is to be a repeal, it must only apply to mortgages taken out after the repeal is put into law.

    If you seriously want to balance the budget the first place to look is two wars that the USA started and the 190 countries where the US maintains a military presence. We're doing a bad job of running an empire that we can no longer afford.

  • Report this Comment On July 29, 2011, at 1:14 PM, Skyblue172 wrote:

    Maintain Mortgage Interest Deductions !!!

    Don't hurt the litte guy and families that benefit.

    Cap the deduction at $20,000 if it must be. This will generate the needed tax revenue for the high end properties and 2nd homes.

    Many of the rich own properties free and clear of interest. This will have no effect on them.

  • Report this Comment On July 29, 2011, at 1:25 PM, Skyblue172 wrote:

    The first cut should be to Federal employee salaries by at least 10%, then cut the Federal employee head count by 5%.

    Reduce Federal expenditures overseas in all areas to reduce the drain on the US economy, that's paying for them.

    Increase the Federal gasoline tax by 10 cents a gallon.

    On Medicare, small increases in the Co-Pays, the Premiums and the Payroll tax will yield big savings. Reduce the Medical Provider reimbursements by 5%.

    Increasing the Federal tax rate on the top 1-2% of Wage Earners will have a dramatice effect on tax revenue. This groups wealth is increasing and the lower income groups are falling.

    There are lots of ways to close the budget gap without hurting home owners and families.

  • Report this Comment On July 29, 2011, at 1:35 PM, Soakingitallin wrote:

    This article just angers me. I've written, erased and rewritten about a half dozen different comments.

    Bottom line, I wish that articles presented stuck to financial markets and equity analysis, and leave commentary of fiscal and monetary policy to another forum.

  • Report this Comment On July 29, 2011, at 4:26 PM, ershler wrote:

    BryneShill,

    What are you talking about? I am no fan of David in Qatar but at least know what you are talking about before you post something. Qatar has the largest production and proven reserves of oil and gas per capita in the world so most of the work is done by foreigners. They wouldn't let David stay if he wasn't working.

    David,

    Correct me if I'm wrong.

  • Report this Comment On July 29, 2011, at 7:46 PM, noodlehopper wrote:

    I haven't seen anyone point out that if the mortgage interest deduction is eliminated, it is very much like double taxation of dividends. That is, the interest paid is a deduction to the the homeowner, but it is taxable income to the mortgage holder. If you eliminate the deduction, that money is taxed twice. Anyway, whatever Congress decides.

  • Report this Comment On July 29, 2011, at 9:09 PM, OzVetFool wrote:

    While mortgage interest on your residence is not tax deductible in Australia, Australian does have a significant tax break for home owners. Any capital gain made on your primary residence is completely tax free.

    Also, interest and other expenses are fully tax deductible on any investment property that you own, and any extra cost over and above the property income can be taken off your normal income tax bill.

  • Report this Comment On July 29, 2011, at 9:20 PM, living2trade wrote:

    I agree with noodlehopper.

    Also, the author has no idea of what the impact of this will be on house prices that are already falling. It's not 10-15% that he's refering to. With no deduction the affordability will immediately go out reach for a majority of new home buyers resulting in even lower demand for new homes and existing homes. And, obviously, the govt. will have to give some notice before bringing the change. During the interim period you will see a stampede rush to the exits by current homeowners sitting on marginal equity. And, many will fear losing the tax-free capital gain as the next move by this bankrupt govt.

    The result will be nothing short of catastrophic. Can you spell "foreclosure enmass" ? Atleast two of our major banks BOA and Wells Fargo may be forced to shut down as result.

    And, do you understand that even after home prices come down and stabilize, higher mortgage payments will favor rent vs buy decision. This will effectively push rents up creating a higher cost of living for most middle class people.

  • Report this Comment On July 29, 2011, at 10:32 PM, muddlinthrough wrote:

    @slpmn,

    My overall arching point is increasing a tax stream to the federal or any taxing agency usually doesn't result in lower taxes or more efficient government or any tangible benefit. Other than a temporary tax revenue increase, unintended or easily foreseeable consequences happen within a few years. Possibly lower taxes on an unaffiliated group in the short-term as the 'payoff' from one group formerly being robbed is passed on to some other interest, while a new victim is fleeced...the lowering the marginal rates sounds great, until you realize that with $14T-going-on-$80T by 2030 means a WHOLE lot more people gonna pay a lot more taxes. And realllll soon.

    Additional items: The mortgage tax deduction is an incentive to itemize; between it and the charitable giving deduction, it makes people who are moderately so inclined to combine the two and get a slightly larger tax break than the standard deduction.

    It used to be harder work to itemize before TurboTax, which may be why it's under fire to reduce the benefits from them. And that the risk of sounding pious for all the wrong reasons, I maximize my charitable giving because of such a tax break; well, both--as any break allows more giving.

    Without the tax break, I'll still give, but the United Way will see about a 50% drop of what I can give them. The money has to come from somewhere; I see less and less examples of where my anonymous donations to the state, local, and federal tax coffers have any benefit to me. And if I'm paying more taxes, less money around to pay the necessities and the niceties. A theoretical (from Housel) 1-2% drop in my tax rate at the loss of a 4% break, when my estimate is my taxes are going up 8-20% in the short-term after the 2012 election cycle--I'm underwhelmed but also justly completely po'd at the non-causal descriptions offered up.

    Mortgages became the rage from the late 90's to 2005 because of loose monetary policy and lending standards and the promoted concept of 'house value = permanent banked funds." Greenspan thinking that 'it can never happen, not the housing market crashing everywhere' is either a self-deception or an outright lie. The mortgage deduction wasn't the cause of that; at worse it was an adder in the calculations in the later stages of the bubble.

    @kkconway,

    I know what I'm talking about, even if I do ramble. And, I'm fairly well educated.

    Them's facts; well, the first is an opinion but I have several thousand examples of successful analysis and ad-hoc comments from others so I treat it as a fact. We'll let it ride as to the validity of my data 'proving' my knowledge to you--so, consider it a possibly valid opinion with high degree of truthfulness. The preceding statement proves the veracity of the 'ramble' assessment.

    <i> As you follow OS as a football team I'm guessing you're not terribly inventive in your thinking. </i>

    Now, THAT is a specious argument.

    <.e., the discount on your own taxes, over against the real benefits which all citizens would share be eliminating all inefficient government policies, which definitely includes the mortgage tax credit.>

    Housel built a specious argument: eliminating one tax break will bring in additional revenue AND lower overall tax rates--just like your argument that me losing an incentive that is no longer functioning as its originally intended incentivization will lead to more efficient government.

    And *I'm* speciously arguing? Have you looked at your own (non)logical thought processes and illusory magical-thinking causality chains, recently?

    I'm calling BS on the second portion of the statement. All things fixed and equal, eliminating a subsidy works to raise taxes if nothing else is changed. You arguing that the greater good will be served by me losing it--I'm arguing that it will possibly if not likely tip me into selling the houses I own, and quitting this wonderfully worn and faded 'Golden State.'

    And I wouldn't be doing it out necessity but of choice. Others who leveraged up JUST FOR THE BIGGER HOUSE will take the shove as a reason to walk away, much less forget selling at a loss.

    I also call BS that he claims it didn't work with a throw-away of 'success here is dubious'...I know 7 people for which it was a deciding factor. I'll agree at the time home-ownership made sense when they were buying, and perhaps as a policy it should be reviewed for the reason it was instigated is no longer valid.

    I also call BS on the 'because it is skewed, it should be removed.' Last time I checked, houses in Cleveland would go 2:1 or 3:1 for the purchase of a 3/2 1500 sqft house in California. Housel doesn't revisit some of the INSANE deductions that were eliminated in 1985. It used to be that you could deduct the interest you paid on CREDIT CARDS. Hey...that affects everyone...let's TRADE and bring that one back.

    Oh, wait. I don't have credit card interest payments, because I manage my monthly payments and don't carry silly debt.

    But! the mortgage deduction still has new reasons for continuing existence--as motcal, Rusamon, skepticmba, and Skyblue point out.

    I cited the loss of tax revenues to Prop 13 as an example of how eliminating one revenue stream doesn't shrink the beast that is federal or near-universal centralized taxation. The government of California cannot close a budget gap of $15-$20B dollars even after increasing revenue by $23B. Taxes have NOT gone down. Property taxes of 1.8% on a $500K mortgage per-annum is NOT a small sum. But, it's insufficient. California already takes 5% of my income for their pleasure out of my paycheck. If I sell stocks, it can be up to a 9% hickey. This is an economic disincentive to be productive. All for the joy of being in the $100K-$400K 'wealthy' club. If my membership there offends you, my apologies. It appalls me, as I see it's a club without a representative in Washington, and it's always the friendless and those that have no one to speak for themselves that are removed...first.

    You're arguing that Housel's premise is right, that the mortgage deduction should be eliminated in an effort to reduce government inefficiencies, and my examples that the policy worked to promote home buying, if not ownership, are invalid and are just to obscure the point that I want my tax break--one of the few that I get. Educate yourself on this section of the AMT: If you're not paying it yet, you will be, unless you fall into that 50% of the population that already pays no income tax. I'm paying my share, from what I can tell, and about 5 or 6 other people's. What's your story? Warren Buffet can give away $4B to Bill Gates and then say I should pay more taxes because it'll help the federal debt?

    Henry Paulson should take a $500M payday, tax free, from Goldman-Sachs to take a government job where he helped blow up the economy then make sure his former employer and Buffet were 'made whole' while his former competitors playing the same game, but weaker, were completely eliminated--along with the pensions and retirement plans of the employees, the shareholders, the invested partners?

    I'm coveting the $N,NNN tax break I get from owning a house that causes more headache than joy. And you want me to be happy and less 'specious' about keeping that balm while the corruption and mismanagement and graft that is our federal revenue collection system goes on and somehow becomes more 'efficient' and 'progressive' by eliminating the balm. Yah, I may be petty, but you're an ignoramus and your momma dresses you funny.

    http://en.wikipedia.org/wiki/Alternative_Minimum_Tax#AMT_cre...

    &

    http://en.wikipedia.org/wiki/Alternative_Minimum_Tax#Avoidin...

    Let's see, in bullets, my points:

    Government revenue streams like AMT are never removed, or recategorized to grab fewer people.

    Those arguing the incentive is worthless aren't paying attention.

    Those agreeing with Housel don't do logic but follow his unprovable arguments (it worked before like *that*, in a completely unrelated timeframe and situation, so it'll work in a completely different environment for a more-entropic, global benefit).

    Those agreeing with me are appreciated but not welcomed, because I'd hate to be as unhappy as I am with the situation, and wouldn't want to wish my dispargaging views on anyone else. However, if you'll read my comments and possibly do something better with your life because they gave you a new viewpoint (God, I'm SO GLAD I'm not THAT GUY), I'll have hopefully had a point and a purpose for posting this.

  • Report this Comment On July 29, 2011, at 10:35 PM, TMFHousel wrote:

    <<With no deduction the affordability will immediately go out reach for a majority of new home buyers resulting in even lower demand for new homes and existing homes>>

    The deduction's mean benefit for homeowners is about $1,500 a year. If $125 a month is the difference between happy ownership and being pushed into foreclosure, it's clear that the owner is leveraged far beyond reason.

  • Report this Comment On July 29, 2011, at 10:38 PM, TMFHousel wrote:

    ^ Sorry, responded to the wrong quote. Try it again:

    <<With no deduction the affordability will immediately go out reach for a majority of new home buyers resulting in even lower demand for new homes and existing homes>>

    The loss of the deduction would be balanced out by the drop in home prices. There's little to no impact on affordability.

  • Report this Comment On July 29, 2011, at 11:03 PM, skypilot2005 wrote:

    On July 29, 2011, at 1:25 PM, Skyblue172 wrote:

    “Increase the Federal gasoline tax by 10 cents a gallon.”

    “There are lots of ways to close the budget gap without hurting home owners and families.”

    Let’s all spell regressive together.

    Sky Pilot

  • Report this Comment On July 29, 2011, at 11:10 PM, skypilot2005 wrote:

    On July 27, 2011, at 12:58 PM, DuG37 wrote:

    "at least by creating a small, but meaningful federal sales tax, the infrastructure is there to allow for a change to perhaps have a small flat income tax (KISS) with no deductions and a more significant federal sales tax that would impact everyone equally."

    Too regressive and not fair.

    Sky Pilot

  • Report this Comment On July 29, 2011, at 11:39 PM, skypilot2005 wrote:

    On July 29, 2011, at 10:38 PM, TMFHousel wrote:

    “The loss of the deduction would be balanced out by the drop in home prices. There's little to no impact on affordability.”

    How is a drop in home prices good for current homeowners? I think it is great to have a higher percentage of folks own homes. But, not at my expense.

    Morgan wrote:

    “What would we get for this? Tax rates would come down and become more competitive worldwide. With a broader tax base, deficits would shrink by more than $1 trillion over a decade.”

    You have greater faith in politicians than I do. I believe this is a fairytale. Just like the one they tell about Obama Care lowering healthcare costs and increasing quality of care.

    History does not support this.

    Sky Pilot

  • Report this Comment On July 29, 2011, at 11:50 PM, skypilot2005 wrote:

    On July 26, 2011, at 6:28 PM, ershler wrote:

    “I think anyone with average military training and intelligence could to more damage to the US government then vice versa.”

    No basis in fact.

    Sky Pilot

  • Report this Comment On July 29, 2011, at 11:59 PM, skypilot2005 wrote:

    On July 26, 2011, at 7:26 PM, whereaminow wrote:

    "Ok, sorry to fill up your article comments, Morgan. Thanks for the discussion.

    David in Qatar"

    David: Come on. You aren’t that busy this weekend are you?

    :)

    Sky Pilot

  • Report this Comment On July 30, 2011, at 9:59 AM, NATCHN wrote:

    IF INTEREST IS TAKEN AWAY, THE LOWER AND MIDDLE CLASS WILL SUFFER THE MOST. A TOP LIMIT OF $ 500,000 AND NO SECOND HOME. ABOVE THAT, TAXES SHOULD BE ENOUGH.

  • Report this Comment On July 30, 2011, at 10:42 AM, south777seas wrote:

    The government needs to keep their greedy, sweaty paws out of the home ownership business. Everything they do only exacerbates the problem. Barney Frank and his ilk are the ones who created this mess and all the Community Organizer has been doing so far is throwing gasoline on the fire and penalizing the ones who month after month make their payments on time. Taxes. Nearly half of the U.S. households pay no federal income taxes. Obama's point man and close adviser buddy Emmelt at GE who's corporation earned $5.1 billion in offshore profits in 2010, didn't pay a penny of that in federal taxes and in fact claimed a 3.2 billion tax benefit. The tax code book has gone from 400 pages in 1913 to 71,684 pages in 2010. It takes Americans 7.6 billion hours a year to deal with this mess. USPS, Social Security, Medicare, Medicaid, Freddie Mac, Fannie Mae are all broke. The DOE was created in 1977 to lessen our dependence on foreign oil and has now ballooned to 24,000 employees and a budget of 24 billion a year and we import more oil than ever before. The government does not need any more of our money and they cannot run a business. The only two words I want to hear out of their mouth is 'flat tax'. Do it and move on and stop making this so complicated.

  • Report this Comment On July 30, 2011, at 11:55 AM, stlmikey wrote:

    We would all be better off with the elimination of most if not all deductions and a lower tax rate (and as someone mentioned, the elimination of AMT). Small credits supporting medical, retirement and education could be appropriate in my view, but I'm hard pressed to understand what long term value most others have - including the mortgage deduction. With a few modest rates - I'm thinking 10%,18% and 25% and a few credits, we could greatly simplify the tax code and most people could understand the impact on their finances of earning an extra dollar or of making a purchase.

    As I mentioned earlier, the current deductions could be phased out in a reasonable fashion to significantly reduce the adverse impacts. A 25% credit for mortgage interest and charitable contributions in the first year (in effect treating everyone as being in the top bracket the first year) and phasing the credit out over 10 years should allow the markets to readjust gradually.

    We are in a fairly significant mess and we need to start taking action to work our way out of it. There have been various commissions that have made reasonable recommendations but it is difficult for anyone to give up their piece of the pie. We have to start pretty soon because the demographic issues are starting to pile up.

  • Report this Comment On July 30, 2011, at 1:28 PM, HappyDog777 wrote:

    Stupid idea to eliminate yet another tax deduction. That said, why not just replace the current tax structure to a 10% (cap) flat tax...across the board on everyone. No illegal aliens - period. Then, create a balanced budget amendment to the Constitution to prevent runaway spending by Congress and the President. Did you know this government sends $1Billion/day to OPEC? What a waste of taxpayer revenues. Also, cut all funding to the Palestinian Authority, Muslim Brotherhood, and other enemies around the world. Stop bailing out failed Banks and corporations... after all they are "for profit" businesses and taxpayers should NOT fund FAILURE.... just change their Board of Directors and Executives for poor performance.

  • Report this Comment On July 30, 2011, at 7:51 PM, PragmaticBuckeye wrote:

    I would love to see this deduction phased out. Subsidies aren't inherently bad, they are an economic tool for altering incentives.

    You need to prove two things to make a subsidy a good idea:

    1) That the thing being subsidized should be subsidized. This is either to promote an outcome more in line with our collective values (e.g. Charitable giving deduction), or to correct a market failure (e.g. Research subsidy).

    2) That the proposed subsidy is properly targeted.

    In this case, the thing being subsidized is interest paid on a home loan. The incentive is to buy a more expensive house, and to pay more interest by taking longer mortgages.

    In effect, the MID is a giveaway to wealthy individuals who would own homes anyway, paid for by individuals who either can't own a home, don't want to own a home, or who don't make enough money to make itemized tax returns worth it.

    The MID is the worst kind of subsidy: free money for people who don't need it that promotes something we don't need. These are the sorts of giveaways that should be targeted in order to make our tax code more fair, and to close our budget deficit. We should certainly look to this sort of low-hanging fruit before we begin to dismantle the social safety net in the name of austerity.

  • Report this Comment On July 31, 2011, at 12:13 AM, chuckster05 wrote:

    First the Government destroys the American economy by forcing banks to give loans to people who do not have the ability to pay them off so the banks invent a method to get out from under a bad investment.

    Now you want the government to punish those who pay there mortgages on time by removing the tax credit. Were were you when this all started?

    Now you want only the rich to own a house. Good thinking.

  • Report this Comment On July 31, 2011, at 2:50 AM, mtghack wrote:

    I'd like to commend Morgan for taking the middle ground. This is what happens when anyone take the middle road these days, either get trashed by the right-winger anti-government anti-tax bunch of be accused of strictly helping the wealthy.

    In my view, government money should be spent on enabling the population to be self-sufficient and doing vital things they otherwise would not be able to do. The mortgage interest deduction does neither of the two. People who can rationally afford houses will go and buy one, otherwise, what's wrong with renting? Is owning such a necessity? Neither is owning a house so difficult that no one can do it.

  • Report this Comment On July 31, 2011, at 9:04 PM, TomBooker wrote:

    "I'd like to commend Morgan for taking the middle ground. This is what happens when anyone take the middle road these days, either get trashed by the right-winger anti-government anti-tax bunch of be accused of strictly helping the wealthy." etc

    TMF!!!! TMF!!!!

    I want to report mtghack as a probable serial terrorist and likely molester of kindly woodland creatures. All of his posts and records should confiscated and immediately dispatched to the CIA, FBI, DHS, and Mothers Against Drunken Nakedness! ;)

    mtghack,

    I think you might have just saved my life.

    It's Sunday night, which means I take some time for a tiny(that's all I can stomach usually) week-in-review and then a look forward to the coming week.

    I also have about 15 ft of nylon rope laying on the floor, next to my desk. It's leftover from tying down a stack of rigid insulation which could blow away in heavy winds, before i get to installing it.

    This was becoming a dangerous confluence of seemingly unassociated events.

    I have been reading head print Media articles for an hour... and I haven't been able to locate anyone who isn't an extreme ideologue (heavy on the.. off the Right edge of reality),.. or a person who is somewhat sensible but also says inane things because he thinks he has to pander to the aforementioned,.. or a person (more like multitudes) who is an obvious whore-for-hire practicing up for the coming election year.(politician or journalist)

    The hopeless feeling from this was tripping quick mental flashes of a beam in my attic.

    The hopelessness was because I was starting to believe there was nobody left in the country who was willing to sit down calmly. and think something through. with the intention of solving a problem, rather than paying alms to some ideology.

    The flashes were because I know that beam could easily support the weight of my noosed body for a sufficient amount of time. :)

    Morgan Housel has (nearly) never written anything which wasn't directed at identifying BS, solving problems, or educating. Occasionally you catch a general vent/rant.

    Much of the time he is writing about things which will bring sense and trust back to our country.

    Being an op-ed guy in TMF's "financialish" Media company, the bottom line narrative to this is finding out the real value of everything. In this case, he leverages it with the common sense fact that the government desperately needs revenues.

    You, mtghack, sound reasonable enough to discuss all possible suggestions and think them through. The is quite exception, when you search Washington and the Media.

    When we go over the cliff, at least I'll have one sensible person to talk with.

  • Report this Comment On July 31, 2011, at 9:08 PM, singocal wrote:

    As an American living in Australia, I've had the opportunity to buy homes under both tax regimes - with and without the mortgage interest deduction. One positive aspect to the Australian version (no deduction) your article does not mention is that when you sell your home (primary residence only), you do NOT pay a capital gains tax on the increase in value (yes, we still see substantial increases in value here). This is a positive tradeoff and a very important part of the overall tax picture. If the deduction is removed in America, then the corresponding capital gains tax upon sale should also be removed.

  • Report this Comment On August 01, 2011, at 12:21 AM, TMFHousel wrote:

    <<One positive aspect to the Australian version (no deduction) your article does not mention is that when you sell your home (primary residence only), you do NOT pay a capital gains tax on the increase in value>>

    Same in America up to $250k single or $500k married.

  • Report this Comment On August 01, 2011, at 10:32 AM, ecoIT wrote:

    On the Australia topic, what about negative gearing? In 2004-2005, AU government paid landlords AU$4B in interest off set. Not exactly the same, but close enough that it's a questionable statement that other countries don't have interest reimbursement.

  • Report this Comment On August 01, 2011, at 4:21 PM, hbofbyu wrote:

    When I bought my first mortgage and learned about the interest deduction, my initial response was "Why?". It made no sense to me. The Fed's logic and many of the Fed programs only make sense when looked at through a provincial, Washington, bureaucratic eye.

    Careers in the Federal government are made by growing your department and digging up ways to justify your existence. Homeland Security popped into existance from 911 shock almost overnight, but will never go away. The public wouldn't dare eliminate something that would "put our children at risk!". And so we continue to be fooled that they keep us safe while we pay them billions upon billions. And so it grows.

  • Report this Comment On August 01, 2011, at 4:37 PM, michlav1 wrote:

    The mortgage interest deduction we are talking about is given by the Federal government not the state. So, whether you get this deduction or not has nothing to do with your local roads, your schools, police force, etc. Your local or state gov't deals with those. Go out onto the interstate and show me potholed roads, not saying they don't exist, because after a snowfall here in the DC area we get a lot, but they always get fixed.

    To the mortgage interest deduction, I would say get rid of it. I do think that those who are currently getting them should continue to do so on their primary residence.

    Some of you seem to think that you should be rewarded for getting a home. You shouldn't. There is no logical reason for that. If you need to factor in a deduction in order to afford your home then you obviously can't afford the home. Buy something cheaper.

    To Asturiman - Yes, 250k is a lot of money. If it's not, then you must have bought too much house, too much car and too expensive a college. Did you forget about the tax break of 4.2% on anything you make over $106,800? Renters also save and earn, they just don't have equity in a home. How does that make you more deserving?

  • Report this Comment On August 01, 2011, at 5:59 PM, NeedaClue7 wrote:

    Morgan:

    Good points, and I agree that the mortgage interest deduction has no tax policy basis. There are a few issues with eliminating the deduction, however:

    - Transition: This has been discussed by others, but I'll add my 2 cents. A mortgage is typically a 30-year economic decision, so how do you explain to someone that just purchased their new home that for the next 29 years they won't be getting that tax subsidy they were counting on when they made their decision to purchase. And if you let them keep their deduction and apply the disallowance prospectively, how do you explain the significant inequity to the person that buys their home in the future? Fairness is an important element of tax policy and it isn't clear to me how to deny the deduction in a fair and balanced manner.

    Renters - Your typical landlord is highly leveraged against their rental real estate and is legitimately entitled to deduct the interest expense associated with residential rental properties. To them, the interest cost is just an expense of doing business like any other expense is to a "for profit" enterprise. If you deny them the deduction, they are taxed on phantom income (money they don't have), the impact of which which they would likely try to pass-on to their renters (market conditions, rent controls, and other factors permitting). So either (1) rents increase on residential rental properties, hitting the people in lower income status the hardest, (2) the landlords bear the increased tax costs which severly reduces the rate of return, cash flows and other financial aspects that were originally contemplated when the property was purchased, or (3) interest remains deductible to owners of residential real estate which sets-up another inequity ( a subsidy would continue for residential rentals but not for residential ownership). None of these options are particularly attractive.

  • Report this Comment On August 01, 2011, at 6:25 PM, NeedaClue7 wrote:

    Another comment. Personally, if the mortgage interest deduction was eliminated I would strongly consider liquidating investments and paying off my mortgages (I realize that not everyone has sufficient investments to do this). I assume there would be a number of people that do the same, and that probably wouldn't be real good for the stock market.

    Better have a really long transition period or plan to put your money in a mattress!

  • Report this Comment On August 01, 2011, at 6:25 PM, stlmikey wrote:

    Needaclue7 - The deduction could and should be phased out over a period of time - ten years should be sufficient but i'd be ok with 15. This would apply to current and prosective owners i.e, the deduction (or even better a credit) would end for all by, say, 2022.

    michlav1 - I agree with your comments but I'd be careful about calling the elimination of the social security tax above 106,800 a tax break. I think most people view their SS benefit as being earned because they contribute to it. While this is true in part, the fact is SS replaces about 45% to 50% of income for those at the low end the wage scale (20,000), about 30% to 35% for those middle income (50,000) individuals and about 25% for those at the 107,000 level. Because no tax is collected on pay above that, no further benefits are earned. So in fact, social security benefits are equivalent to a progressive tax system - which I think most of us believe is ok.

  • Report this Comment On August 01, 2011, at 7:26 PM, rcpass wrote:

    I think a good title for your article would be, "How to further the war on the middle class". Poor people don't have mortgages. Rich people don't have mortgages. If we take away the deduction, more people will be left with no option but to rent. Who would that help? Take away the deduction and the real estate market will plummet while foreclosures rise.

    If we really need more revenue, it might be a smart idea to go where the real money is. It certainly isn't in the hands of the poor and middle class!

  • Report this Comment On August 02, 2011, at 9:22 AM, SpaceVegetable wrote:

    @michlav1:

    $250K might buy a nice home if you live in East Podunk, Middle of Nowhere, but try getting anything more than a shack for that in any coastal urban areas. That's the biggest problem I have with flat dollar-value caps on the deduction.

    Those of us living in high-cost areas already get screwed by these flat amounts in things like tax brackets and other deductions. All of it needs to be indexed by zip code. It wouldn't be hard, since the government already compiles zip-indexed per diem tables for business meal and lodging deductions.

    As for eliminating the mortgage interest deduction... yeah, sure, slam the housing market when it's barely hanging on. There are many people out there like me: hanging on, keeping my head above water, with the shoreline finally coming into sight. Taking away the mortgage deduction will be like shoving me into a riptide.

    I'm a single homeowner, make over $100K and live in a high-cost area. My savings, including retirement, were demolished due to a bout of unemployment (had to sell out after my retirement accounts lost 80% of their value just to pay the bills). Now, after 2 years of paying down debt (including taxes to the IRS that I couldn't pay at the time) I'm finally starting to get ahead a little and actually save a bit.

    Taking this deduction away will cost me more than $5K per year. And no, I didn't buy more house than I could afford (bought in 1994) or take out all of my equity like some morons did. Median home prices around here exceed $350K. Plus, my property taxes are around $5K. Before you say "move to a lower-cost area", you know you kind of have to go where the work is. And for me, that means high-cost urban/suburban areas.

    Like someone else has already said, the poor and the wealthy don't have mortgages. It's only us middle-class folks. Taking away the deduction will do irreparable hard to the economy at a time when it's exceedingly fragile. Seems to me it's more of the same class warfare nonsense, with people pushing for taxes on everyone besides themselves.

  • Report this Comment On August 02, 2011, at 3:32 PM, BxBruce007 wrote:

    The best argument against the mortgage tax deduction is this - why should home owners be treated better than renters? No one forces you to buy a home. Why should you be subsidized by the government for doing so?

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