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Sunday, October 28, 2012

NYT questions value of mortgage interest deduction

The New York Times ran an article on 10/25/12 - "Who Really Benefits From Interest Deductions" by Lisa Prevost. It points out a few factors I have noted before in the blog (8/23/12 post and 7/3/11 post, for example). For example, since only 1/3 of filers itemized their deductions and not all itemizers have a home mortgage, less than 1/3 of homeowners benefit from the mortgage interest deduction. Also, the benefit tends to be significant, but primarily benefits those with income above $100,000. The author also refers to the mortgage interest deduction as a subsidy.

I know many object to that characterization (subsidy). They believe they are entitled to the deduction as a way to measure income. But, why?  Why that deduction and not the cost of college tuition or insurance or driving a nice car or taking care of pets?  When someone gets a deduction to lower their taxes, someone else (everyone) must pay higher taxes to allow for that lower tax bill.

Also, why have a deduction for mortgage interest when it does such a poor job of meeting its goals of encouraging home ownership?  The benefit goes primarily to higher income individuals and research shows it tends to just help them afford a more expensive home?  Also, home ownership rates in the US are similar to those of countries where there are no special tax rules?

Also, how does a deduction on mortgage interest on a vacation home help home ownership (it should be on your primary home, not your vacation home)? How does allowing interest deduction on an up to $100,000 home equity loan encourage home ownership?  It primarily encourages extra debt and is inequitable because a person without a home or without home equity who borrows, such as to buy a car, will have non-deductible personal interest expense.

The mortgage interest deduction is a $95 billion annual tax expenditure benefiting less than 1/3 of taxpayers. I think the economy would benefit by using part of that money to reduce the debt and the rest to help people purchase a home who might not otherwise be able to (people how today might not be itemizers).  The mortgage interest deduction also leads to overinvestment in housing. How might the economy benefit if some of that money went to other investments?

I realize that homeowners are not the only beneficiaries. Indirectly, the construction, real estate sales and mortgage financing industries also benefit. But that should not be reason to provide significant subsidies to high income homeowners.

Any change should be phased out with transitional relief provided to those with acquisition debt obtained in reliance on the current $1 million debt limit.

What do you think?   



Clifford M. said...

I think the NYT has the right to question this act since only few people are benefited on this one. "the benefit tends to be significant, but primarily benefits those with income above $100,000" not all citizens has this income, right?

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