Thoughts, essays, and writings on Liberty. Written by the heirs of Patrick Henry.

August 13, 2007

Eliminate The Home Mortgage Interest Deduction ?

by Doug Mataconis

That’s exactly what one economist argues:

Why do we subsidize mortgage interest? More than Social Security–the benefits of which are taxed–it’s the most sacred cow in the Federal Budget. But it’s a truism that a subsidy yields higher prices. Home sellers can charge more because buyers are effectively subsidized by their ability to deduct mortgage interest. The purpose of the deduction is to encourage home ownership even though the deduction extends to people who hardly need government largesse. Canada has no mortgage interest deduction and yet its rates of home ownership are comparable to those in the United States. In other words, if we phased out the deduction, it probably wouldn’t reduce the rate of home ownership.

(…)

We should have a debate about whether we really need it any more and how it might be phased out without disrupting the economy and the lives of homeowners, many of whom already find themselves in turmoil because of the subprime collapse.

It’s a radical proposal no doubt, but I think that Cooper has a point here. To extent that taxation has to exist at all, it should exist solely for the purpose of raising revenue. From the beginning of the income tax, though, Congress and the White House have used it as an instrument of social policy; accomplishing things via the tax code that they’d never be able to pull off if they actually had to pay for it.

Like Social Security, though, the Home Mortgage Interest Deduction has become a political sacred cow. Anyone who even came close to suggesting it’s elimination would, no doubt, find themselves buried by protesting homeowners and lobbyist from the building industry, the legal profession, and the National Association of Realtors. All of whom will no doubt argue that such a move would destroy the housing industry.

As Nick Gillespie notes, though, Congress did something like this back in 1986 when it eliminated the deduction for credit card interest and, contrary to predictions, that industry has thrived over the past 20 years.

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  • http://www.kipesquire.com KipEsquire

    The ironic part is that despite its “sacred cow” status, few taxpayers actually benefit from it, since most filers take the standard deduction anyway, and some of those subject to AMT also do not fully benefit from it.

    But I concur that there is a certain “detrimental reliance” argument against summarily revoking it (i.e., “I was counting on it when I bought my home in the first place…”).

  • Norm Nelson

    I agree that the mortgage intrest rate deduction should be eliminated. What folks don’t understand is that it benifits banks. To avoid taxes people are willing to pay a bank $1000 to save $700. How whacked it that?

  • http://www.belowthebeltway.com Doug Mataconis

    Kip,

    I must admit I’m not sure how we could go about eliminating the HIMD without dealing in some way with the detrimental reliance you mentioned.

    This is another way that this deduction is similar to Social Security.

    Practically, we can’t simply eliminate either of these programs without finding some way to compensate the people who made decisions in reliance upon them.

  • http://www.belowthebeltway.com Doug Mataconis

    Kip,

    And one other point, would your (or anyone else’s) opinion change if we were also talking about eliminating the property tax deduction as well ?

  • To Rule is to Destroy

    This might actually work. By eliminating HIMD, most Americans would obviously incur a higher tax bill. They would look around and think. “What the hell are they really doing for me, with all these taxes” Then comes the fun part. Finally the majority would be solidly behind the reduction in government spending, and the repeal of the 16th Amendment. Therefore I say do it. Stand back watch all the good blowback it creates.

  • Norm Nelson

    Its easy to phase out. You just have to decide how long to take. For a 10 yr phase out 90% 1st year 80% 2nd ….

  • Aaron

    No candidate would get rid of it if they want the votes. It’s good for the economy and promotes homeownership. No way it goes. Not in my lifetime. Just tax the personal income over $250k and rasie corporate taxes. That may even generate enough for universal health care! C’mon guys. This makes sense.

  • TanGeng

    Repealing the HIMD is raising taxes without raising tax rates. You have to wonder how popular that would be. I don’t think that the HIMD will be repealed unless all social engineering programs in the tax code are repealed – probably in the scenario in which the 16th amendment goes away.

    LOL @ Aaron.

  • http://www.pubcrawler.blogspot.com/ tkc

    I disagree with this notion: “Why do we subsidize mortgage interest?”

    Letting you keep more of what is rightfully yours is not a subsidy.

  • http://www.theothersideofkim.com Jmarsh

    tkc: I agree, but it hides the impact of the taxes, which is counter productive.

    Aaron: I have to disagree. Part of the problem is that so much of the populace doesn’t pay any effective taxes, they’re more than happy to dump billions of other people’s money on Africa, etc. Everyone must pay federal tax, even if it’s only a 1% levy. Are many of us forgetting that tax receipts have once again hit an all new high? You discuss raising taxes to pay for stuff, but the bottom line is that over 2 TRILLION dollars in tax receipts (buried in yesterday’s WSJ) isn’t enough to feed the giant entitlement machine.

  • Jim Bradley

    You’ll blow up the entire underpinning of debt (improved land) at just the wrong time by eliminating home interest deduction – and change the rules in mid-game for millions of people who are using the long term appreciation of their homes to protect themselves from the ravages of government money depreciation.

    You should be looking to improve society as a whole not hammer the middle class: instead recommend lowering all non-mortgage taxes to make the advantage to homeowners less.

    In fact, if the gov would cut their expenditures by 50% and lower taxes by 50% we’d see a boom like you wouldn’t believe (imagine converting 1 trillion in counterproductive activities to real wealth creating benefits: probably a 50 trillion effect). We could instantly collateralize (by increases in production) all economic debt in one stroke (including government debt, as real payment is derived from the production of the economy).

  • http://b4freedom.blogspot.com b4freedom

    Here is the problem:

    Taxes NEVER go down. NEVER! This will mean a tax increase. I don’t want a tax increase. I pay too many taxes as is. The middle class in America is being squeezed to death. I’m tired of seeing supper rich pay less in taxes then I do. I’m tired of driving to work and seeing poor people sitting on their ghetto steps, dealing drugs, not working while I know my taxes pay to subsidize their kids daycare and their food stamps. I’m tired of paying excessive property taxes to fund curruption.

  • Brent

    Thats all we need, another item w can let the government take away. Why don’t we just give them everything, they get 50% of everything we make now. We are like the frog in the boiling water, being cooked slowy into socialism one day at a time.

  • pm

    I thought the Mortgage Interest Deduction was what helped spur home ownership. So, if that is eliminated and we pay property taxes and/or asset taxes; exactly why would anyone want to own a house. I know, we’ll let the government provide the housing and we can all rent from them….Is that what we want? There has to be some atleast appearance of benefit to owning a home. I can remember when they offered deductions for all loans car and otherwise…they rolled that back too. I know,hy should I work to have 60% of my wages taxed to benefit everyone else….why not let the government subsidize by houseing, healthcare, food stamps and the like. I probably wouldn’t have the other stresses in my life, right. The government has all the answers…and when everyone does this exactly where will the revenue come from? Always putting the cart before the horse.

  • Tom

    If we would just vote Ron Paul in as President this would all just be a mute point, as he wants to do away with the IRS completely.

  • Frank

    the interest deduction is a government entitlement program. To those that complain about government handouts, please leave that off your tax return next year. No? Then don’t complain. Social engineering by the tax code is wrong. Period.

    What should happen is this: Increase the personal exemption to a neutral amount, eliminate the standard deduction, and junk the rest. Simple and a done deal. No more tax returns, no capital gains tax, and no loopholes. The lower income folks would be ok, and the rich would pay their fair share based on one tax bracket. And the rich can have their capital gains, which would spur investment.

  • Rick

    The mortgage deduction is really only for the middle class. Higher incomes are subject to Alternative Minimum Tax – A.M.T. that fazes out the Mortgage Deduction. Increasing taxes on the middle class, that is already the highest portion of the foreclosures, would add another nail in the coffin of the real estate market for years to come.

  • Chris

    Why in the world would this be a consideration at a time when the housing market is in enough trouble witht he credit crunch. I think that you are a moron for suggesting it. This is effectively a tax increase for homeowners. Homeowners make up a massive part of consumer spencing. All this do is reduce the amount of consumer spending and have a ripple effect throughout our economy. You must be a Dem.

  • ddcdevelopment

    THIS IS INSANE! pm is the only rational response to this article so far. this has nothing to do with ‘subsidizing higher home prices’ or ‘government entitlement programs’. I have to assume most posters are not familiar with corp tax law versus personal tax law and its implications to this topic.

    Yes, our current tax setup is antiquated and convuluted. Yes, Washington uses the tax law to their own advantage. However, those two truths do not trump another truth, an economic truth. which is whatever you tax, you discourage; whatever you reward (give a tax break) you encourage. Washinton at least knows enough to know that it cannot house an entire country. just like Washington cannot employ an entire country. The HMID is the governments instrument to encourage home ownership. the same situation applies to corporations. corporations get tax breaks that employees or sole-proprietors do not. period. is it fair? from some angles, yes, very much so. the government has to give corps tax breaks to encourage corporations. its the corporations that employ a huge percentage of our workforce.

    for anyone that does not agree with me, that’s fine. that is your right. but please go study the S&L crisis and the following real estate slump in our country during the 1980’s before you tell me how wrong I am. if you would study what caused the real estate slump and the S&L crisis during the 80’s, you would understand this topic much better.

  • Bob Brown

    This business of owning your own home is not the answer; it is owning the land. If you are looking for tax protection for your income, home ownership is not the answer, business ownership is. Owning your own business provides many opportunities for protecting the business’s income, and also creates jobs — both for employees, and also via contracts with other businesses. Business ownership is good for both the owner and the country.

  • David Wooten

    Calling the mortgage interest TAX deduction a subsidy or entitlement is communistic as it is based on the collectivist notion that everything one earns belongs to the government and anything the government lets him keep is a subsidy. The government is not an end in itself. It exists only to serve individual citizens who have a right to the money they earn. Their tax payments are, or should be for legitimate government services only. Rather than eliminate the deduction, we should extend it to the the equity portion of mortgage payments and so encourage paying off debts.

  • Norm Nelson

    You’re right in that current tax law through the HMID has the effect of a subsidy. It increases what it was designed to increase, home mortgages not just home ownership. Some act as if home ownership by itself is not a good thing. That you need the HMID in order to make home ownership attractive. BS.

    One unintended consequence of HMID is that house prices go up. Well that is great for sellers but terrible for buyers. The HMID helps to hide the true cost of home ownership and transfers the higher costs to bank profits. I think that is immoral and should be stopped.

  • Frank

    Perhaps you haven’t noticed that the deduction drove prices ever higher when coupled with artificially low interest rates? I believe that the fed along with the tax treatment of mortgage interest encouraged ever increasing mortgage debt. It does not encourage homeownership, it encourages mortgage debt. We have been tought to use our equity to pay off non-deductible debt. As a result, our homes are mortgaged to the hilt. How can this be good?

    Maybe you didn’t notice that I said that the personal exemption should be tax neutral? Just because you may have foolishly taken on a huge mortgage, just because of the government subsidy shouldn’t make you a smart guy.

    They say you can farm the land or you can farm the government.

  • pm

    I don’t believe I have ever understood economics completely so bear with me (Again I understand wanting to have the deduction so there is value in owning rather than renting don’t we also deduct the property taxes paid on our Returns Schedule A if you itemize.); but I never quite understood the basis behind rewarding homeowners(deductions) for financing 100% of the value of the home and taxing savings. Something seems wrong with the picture. Shouldn’t there be some balance?

    Another thing that has always bothered me..Why is it that the Property Taxes, Recording Costs, State and County Transfer and Documentary Costs are not required to be compiled in a form of the Truth In Lending for Mortgages? Wouldn’tit benefit a consumer to see the compilation of fees/assessments that the government is receiving as a part of a real estate transaction in the same manner that Lenders/Brokers/Bankers are required to disclose their income? After all the Banker/Lenders/Brokers are suppose to have the risk in Lending…Interesting Food for Thought..How scary it would be to actually see the percentage our Income and closing costs are actually going into the government….How dare we actually get a deduction for all that paid in.

    Shame on us.

  • TanGeng

    pm,
    about your comment earlier:

    The mortgage deduction doesn’t promote home ownership. If we wanted to promote homeownership, instead give everyone that owns their home a significant but fixed deduction.

    The mortgage deduction promotes borrowing to finance home purchases. The only way to use the deduction is to have a mortgage! You get nothing if you own your house with no debt attached. Furthermore, it benefits the people who borrow a significant enough amount to see a significant benefit from itemized deductions.

    It also helps people who borrow to purchase a house for investment purposes or for recreational purposes. We’re talking about landlords or people wealthy enough to have summer homes.

    The HIMD is awful in terms of promoting home ownership. The only problem is how do we get rid of it without hurting millions of people who have made economic plans around the HIMD. Removing the HIMD will profoundly reduce the price of the more expensive houses and severely hurt those in the upper middle class. I’m not sure what will happen to the prices of the cheaper housing since removing the HIMD will likely increase demand for housing that cost less.

    and for your most recent comment.
    There is one reason why the state loves buying and selling of real estate. That is all the fees and taxes it can collect during the transaction process. This is the reason the state will promote all kinds of home buying and perpetuate the myth that buying and selling houses is good practice. Those fees fills the coffers of the government and allows them to enact their policies that have specious value.

  • pm

    TanGeng,
    I don’t see a problem with the interest deduction for investment or summer home ownership either. The fact is that if you have individuals that are willing to invest in this country by doing so I can’t see why we can’t deduct the interest on the loan that we are using to buy it. After all, we are contributing to an increased tax base each of those properties as well. Americans have always wanted bigger and better homes…to somehow state that we will be satisifed with more modest housing needs if this deduction were not there is short sited. The tax deduction does spur homeownship regardless of how you spin it…1) Lets say you a a single man making over 40,000 a year and living at home with mom….Tax advisors will advise you to buy a home so that you are doing something other than paying a significant portion of your income to Uncle Sam + the joys of owning a home (oh yeah, and let us not forget the joys of maintaning it – Remember at home, Mom and Dad have the joy – so why would you move? 2) You are married and making over 6 figures a year and modest 6 figures but non the less, you are now considered one of the wealthiest of americans and as such you have a bulls eye on you…for how better to reward success than over taxation and removing any and the interest deductions that the lower to middle class have. Well there you have it based on the overtaxation and No Deductions whatsoever, you are now basically back to lower middle class. Wonderful. Tax Consultant will again advise you to invest in real estate, Second Home, Investment Properties (Let us not forget that on Investment Properties there is a depreciation factor…but don’t say it to load that will be the next perk to go). Spead Money to Save Money. Deduction = Mortgage = Home Ownership….the mind set is there and it is one of the few factors that the Upper to Middle Class have.

    I may not be an economics major here..but if you remove the taxation benefit how or why would anyone buy. Remember this isn’t the days of yester year…very few of us have $417,000 (Conforming limits) to plump down on a piece of property to buy a home for the glory of deducting the property taxes paid in and the glory of maintaining it. Financing Homes Stimulates the Economy and like it or not (all of us) must agree that Real Estate in America effects every aspect of the economy…cut the head off – the only significant perk tax benefit to it…why would we invest in this country? Why?

    When did it become a crime to be successful and America? It seems to me that there are more than a few things mixed up with this. You want to take the deduction away….albeit …do it and how to do you stimulate those that are strapped into making the leap from renter to owner? What is their motivation?

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