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The Home Mortgage Interest Deduction? Kill it.

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Started 1 year ago by jeff_r
Latest reply from Tenzo

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jeff_r

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The home mortgage interest deduction came up in the library levy discussion so I thought I'd start a thread for it.

Seriously, I'd be happy to see this go away. From what I can tell it's nothing more than a tool for banks to sell bigger mortgages and realtors to sell more expensive homes.

Both times I've bought a house I went into the process committed to staying within my means. Both times the realtor and loan officer tried to talk me into "buying more". Not coincidentally, both used the home mortgage interest deduction as a lever, "Oh, you can afford to go higher because you'll get the interest deduction back at the end of the year". Right, and you'll get a bigger commission. No thanks.

So, yeah...kill it.

Posted 1 year ago #
kit444
Elsewhere
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jeff_r wrote >>
The home mortgage interest deduction came up in the library levy discussion so I thought I'd start a thread for it.
Seriously, I'd be happy to see this go away. From what I can tell it's nothing more than a tool for banks to sell bigger mortgages and realtors to sell more expensive homes.
Both times I've bought a house I went into the process committed to staying within my means. Both times the realtor and loan officer tried to talk me into "buying more". Not coincidentally, both used the home mortgage interest deduction as a lever, "Oh, you can afford to go higher because you'll get the interest deduction back at the end of the year". Right, and you'll get a bigger commission. No thanks.
So, yeah...kill it.

+1

I'd be interested to see how much this subsidy (or "tax expenditure" as the Deficit Reduction Committee calls it) costs annually. Unfortunately, I think it's a third rail politically because so many people benefit by it and the homebuilding industry affects so many other aspects of the larger economy.

Posted 1 year ago #
Snarf
Dystopia
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So the home mortgage interest deduction is an evil trick used by independent contractors and banks to make more money? lol.

Posted 1 year ago #
Brant
Gahanna
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Funny you should mention that term...

Their recommendations are more or less a list of the third-rail issues of American politics, including cuts in the number of federal workers; increasing the costs of participating in veterans and military health care systems; increasing the age of Social Security eligibility; and major cuts in defense and foreign policy spending. They also encompass a range of tax system reforms that have been floated by many in Washington for years to little effect, including funding tax rates reductions by eliminating many beloved credits and deductions.

Source

Posted 1 year ago #
Tenzo
Chicago Lakeshore
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It's what is left of the interest deduction.

Used to be if you paid loan interest on a car, home, credit card, student loans, etc. You could deduct the interest. The idea was that it was a wash because whoever received the interest paid taxes on it.

The individual passed the tax burden from them to the banks or lenders.

They have phased this out for all but the home deduction. It's been a way of raising taxes. It's been the last to go because it encourages self sufficiency by helping people with the basics of food, clothing and shelter.

It's not just a benefit to homeowners but home renters as well. If your landlord could not deduct the interest payments on your loan, then rent would go up also.

So you are basically suggesting increasing the price of a basic necessity across the board?
(Well, except for the rich who dont' have mortgages.)

So you are suggesting making the middle class and poor pay more taxes?
Nice

Posted 1 year ago #
Twixlen
Westgate, Columbus
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Tenzo wrote >>
It's what is left of the interest deduction.
Used to be if you paid loan interest on a car, home, credit card, student loans, etc. You could deduct the interest. The idea was that it was a wash because whoever received the interest paid taxes on it.
The individual passed the tax burden from them to the banks or lenders.
They have phased this out for all but the home deduction. It's been a way of raising taxes. It's been the last to go because it encourages self sufficiency by helping people with the basics of food, clothing and shelter.
It's not just a benefit to homeowners but home renters as well. If your landlord could not deduct the interest payments on your loan, then rent would go up also.
So you are basically suggesting increasing the price of a basic necessity across the board?
(Well, except for the rich who dont' have mortgages.)
So you are suggesting making the middle class and poor pay more taxes?
Nice

Actually, the article linked & everything I've heard & read about this shows that they are suggesting killing the mortgage interest credit, but LOWERING the federal tax rate on individuals & corporations considerably. Ultimately, that benefits folks who are on the lower end of the pay scale, as they are generally unable to take advantage of the mortgate interest tax credit anyway.

I am for it - although I know it'll never happen. I think especially at a time when the real estate market is barely making it, no one will want to do anything that could potentially hinder the sale of houses.

Posted 1 year ago #
pilsner

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In a perfect world I'd support killing the mortgage interest deduction but it won't happen because property values are already going down and killing it would accelerate that which would be a back-breaker for local goverments and school districts that rely on property taxes.

Posted 1 year ago #
gramarye
In Exile
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+1

It doesn't just lull people into taking larger mortgages. It lulls them into taking longer ones, and (even worse) "nontraditional" ones that inevitably involve a lot more in interest, because that interest is subsidized.

If the government really wanted to subsidize homeownership, they should provide a tax deduction for a portion of the equity buildup in a house (i.e., the principal being paid down), not the interest, which represents payments that don't actually get you any more ownership in your house.

And, of course, it would be much easier and simpler for the government to simply do neither.

Alongside this, I would like to see a broader shift in cultural attitudes towards renting. There is a stigma attached to it, especially for people over 30. I think this pushes a lot of people into the housing market that might be a little more cautious if we had a more tempered cultural attitude towards homeownership.

Posted 1 year ago #
kit444
Elsewhere
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Tenzo wrote >>
It's what is left of the interest deduction.
Used to be if you paid loan interest on a car, home, credit card, student loans, etc. You could deduct the interest. The idea was that it was a wash because whoever received the interest paid taxes on it.
The individual passed the tax burden from them to the banks or lenders.
They have phased this out for all but the home deduction. It's been a way of raising taxes. It's been the last to go because it encourages self sufficiency by helping people with the basics of food, clothing and shelter.
It's not just a benefit to homeowners but home renters as well. If your landlord could not deduct the interest payments on your loan, then rent would go up also.
So you are basically suggesting increasing the price of a basic necessity across the board?
(Well, except for the rich who dont' have mortgages.)
So you are suggesting making the middle class and poor pay more taxes?
Nice

First, the student loan interest deduction is still in place, at least for people below an income threshold (currently $70,000 for an individual and $145,000 for a couple).

Second, removing the interest deduction would reflect the true market prices for housing and rent. It increases the cost of rent only if the landlord has financed (or refinanced) the property. True in most of the cases probably but not universally. If anything, the mortgage interest deduction encourages an excess of financing. People take second mortgages because there is a tax benefit that increases the financing bubble.

Third, removing the deduction (and other deductions) would be (or at least, should be) coupled with a reduction of the marginal rates and a consolidation of the brackets. This would result in a simpler tax code to file under and to process--resulting in less government and less administrative cost.

And yes, any change in the tax code will result in some people paying more in taxes. It will also result in others paying less. The impact won't necessarily be all on the lower and middle classes. Removing the jungle of deductions and credits can only the make the tax system more transparent and fairer, in my opinion.

Posted 1 year ago #
gramarye
In Exile
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pilsner: You're among the last people I'd expect to hear defending the property-tax-based system for local government and school district funding.

Posted 1 year ago #
gramarye
In Exile
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kit444 wrote >>
And yes, any change in the tax code will result in some people paying more in taxes. It will also result in others paying less. The impact won't necessarily be all on the lower and middle classes. Removing the jungle of deductions and credits can only the make the tax system more transparent and fairer, in my opinion.

True.

It's a third rail, as Brant said, because it's a quintessentially middle class tax deduction. The poor can't get it (because they can't buy a house) and the truly rich don't need it (because they can buy houses outright). Note that the rich often take advantage of it anyway, though--they just buy even bigger houses, well into jumbo territory.

Posted 1 year ago #
Tenzo
Chicago Lakeshore
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And yes, any change in the tax code will result in some people paying more in taxes. It will also result in others paying less.

In my experience, I have not seen this.
In Columbus I have seen raises in parks funding, and an income tax increase of 25%

Removing the jungle of deductions and credits can only the make the tax system more transparent and fairer, in my opinion.

Here I could not agree more.
Simplest tax system I have seen is in scotland.
17.5% tax on everything you buy and prices are posted with the tax.
$8 sandwich is $8
helps with the whole carrying change thing also

Posted 1 year ago #
jeff_r

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Tenzo wrote >>
It's what is left of the interest deduction.
Used to be if you paid loan interest on a car, home, credit card, student loans, etc. You could deduct the interest. The idea was that it was a wash because whoever received the interest paid taxes on it.
The individual passed the tax burden from them to the banks or lenders.
They have phased this out for all but the home deduction. It's been a way of raising taxes. It's been the last to go because it encourages self sufficiency by helping people with the basics of food, clothing and shelter.
It's not just a benefit to homeowners but home renters as well. If your landlord could not deduct the interest payments on your loan, then rent would go up also.
So you are basically suggesting increasing the price of a basic necessity across the board?
(Well, except for the rich who dont' have mortgages.)
So you are suggesting making the middle class and poor pay more taxes?
Nice

While your concern for those at the lower end of the economic spectrum is admirable, I believe the current home mortgage interest deduction hurts them right now. It hurts them by artificially inflating housing costs. If the mortgage interest deduction (MID) were phased out you would likely see a decline across the board in housing costs, both for homeowners and renters. Your landlord could actually charge less simply because he/she would have paid less for the building in the first place.

Advocates of the mortgage-interest deduction, for instance, claim that it increases homeownership rates. But it doesnÃ¢â‚¬â„¢t: in countries where mortgage deductions have been eliminated, homeownership rates havenÃ¢â‚¬â„¢t dropped. Instead, the deduction simply inflates house prices.

The idea that the deduction functions as some kind of gateway to homeownership is suspect as well.

...for a half century--until the recent real estate boom and bust--home ownership rates in the U.S. have barely budged even though the value of the deduction has fluctuated widely. Similarly, there is no clear connection between home ownership and the availability of mortgage deductions in other countries.

As to who the real beneficiaries of the MID are, it's those in the higher income brackets:

Despite recent attempts by real estate, home building, and mortgage-lending organizations to portray the home mortgage interest deduction as vital to middle-income family budgets, an analysis of data from the Internal Revenue Service tells a different story.

The most recent IRS data show few low- and middle-income taxpayers benefit from the home mortgage interest deduction. Those who filed tax returns with under $30,000 in adjusted gross income (AGI) in 2003 received just 9 percent of deductions for home mortgage interest, despite filing 52 percent of all tax returns. (The median taxpayerÃ¢â‚¬â„¢s AGI was approximately $29,000 in 2003.) In contrast, 36 percent of home mortgage interest deductions were claimed by taxpayers with AGIs over $100,000.

Posted 1 year ago #
Andrew Hall
Dennison Place (The Circles)
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Snarf wrote >>
So the home mortgage interest deduction is an evil trick used by independent contractors and banks to make more money? lol.

Evil trick? No. Way to use slimy rhetoric instead of thought tho.

The NAR is a non-small lobby. (Was largest recently) The home mortgage interest tax deduction is obviously very much in their interest and they will use that power to defend. Not evil, just politics. In addition, the banking industry and the building sectors also wield a great deal of influence.

The discussion of whether home ownership is a social good to be promoted with the tax code is simply never going to occur on an even playing field.

A.

Posted 1 year ago #
thepiece
merion village
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gramarye wrote

+1
It doesn't just lull people into taking [i]larger mortgages. It lulls them into taking longer ones, and (even worse) "nontraditional" ones that inevitably involve a lot more in interest, because that interest is subsidized.
If the government really wanted to subsidize homeownership, they should provide a tax deduction for a portion of the equity buildup in a house (i.e., the principal being paid down), not the interest, which represents payments that don't actually get you any more ownership in your house.
And, of course, it would be much easier and simpler for the government to simply do neither.
Alongside this, I would like to see a broader shift in cultural attitudes towards renting. There is a stigma attached to it, especially for people over 30. I think this pushes a lot of people into the housing market that might be a little more cautious if we had a more tempered cultural attitude towards homeownership.
[/i]

I completely agree on the points above. It artificially drives up the cost of housing, also there are major geographic disparities in who benefits (article), consider the amount written off every year in California (due to their overinflated market) and midwestern states like Ohio.

Other proposals for the deduction that I like include the idea of capping the overall deduction amount or making it a flat tax credit, which would still preserve most of the benefit to middle and low income homeowners.
Ed Glaeser has an interesting article on this topic.

Posted 1 year ago #
economic guru

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Interesting discussion, I've been following it in the news.

Mortgage interest rate deduction is a sacred cow. In reality it is a form of welfare for the wealthy. Those that bemoan people receiving any type of government assistance have no problem accepting the deductions though.

Interesting that CANADA does not allow this deduction, never had the housing bubble and has an almost identical housing ownership as the US does.

http://www.american.com/archive/2010/february/due-north-canadas-marvelous-mortgage-and-banking-system

Posted 1 year ago #
GW_Justice
Grandview Hts.
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Another group that will fight taking away the Mortgage deduction tooth and nail - the tax preparation industry (H&R, etc). They like complex taxes.

You do know that the feds could send most people a tax form that was pre-filled out (they have all your data) and you could just look it over then sign it? And the tax prep people (along with the anti-tax groups who want tax preparation to be as hard as possible) won't let that happen?

Posted 1 year ago #
bman
New Albany
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I think this is a really a crazy idea. How would you handle those people who have bought a house and currently have a mortgage on that house. If the idea is eliminate this deduction to drive down the price of houses would that not put current indebt homeowners even more upside down on their homes?

For example say I have a $300,000 home and owe $200,000 and you eliminate this deduction and the value of my home plummets to $225,000 and I have to sell and move for a job am I just out $75,000 so that home prices drop?

Posted 1 year ago #
jeff_r

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bman wrote >>
I think this is a really a crazy idea. How would you handle those people who have bought a house and currently have a mortgage on that house. If the idea is eliminate this deduction to drive down the price of houses would that not put current indebt homeowners even more upside down on their homes?
For example say I have a $300,000 home and owe $200,000 and you eliminate this deduction and the value of my home plummets to $225,000 and I have to sell and move for a job am I just out $75,000 so that home prices drop?

The idea isn't to drive down the price of houses, that would simply be one of the side effects. When people talk about getting rid of the MID it's because it's viewed as mostly a tax subsidy for banks, realtors, and upper income homeowners that failed to do what it promised (i.e. increase homeownership in any appreciable way, particularly among the poor and lower middle-class).

Also, usually the people who propose doing away with the MID talk about phasing it out and grandfathering homeowners in. It's unlikely that anyone who's currently receiving this deduction would simply have it evaporate.

As to the drop in home prices, it's hard to imagine it would be as dramatic as your example. Even if it were, it could be argued that the $225,000.00 price is a more accurate reflection of the value of the home. At the very least you'd know it's not a price that's been artificially propped up by the lure of a big tax write-off.

Posted 1 year ago #
bman
New Albany
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jeff_r wrote >>

bman wrote >>
I think this is a really a crazy idea. How would you handle those people who have bought a house and currently have a mortgage on that house. If the idea is eliminate this deduction to drive down the price of houses would that not put current indebt homeowners even more upside down on their homes?
For example say I have a $300,000 home and owe $200,000 and you eliminate this deduction and the value of my home plummets to $225,000 and I have to sell and move for a job am I just out $75,000 so that home prices drop?

The idea isn't to drive down the price of houses, that would simply be one of the side effects. When people talk about getting rid of the MID it's because it's viewed as mostly a tax subsidy for banks, realtors, and upper income homeowners that failed to do what it promised (i.e. increase homeownership in any appreciable way, particularly among the poor and lower middle-class).
Also, usually the people who propose doing away with the MID talk about phasing it out and grandfathering homeowners in. It's unlikely that anyone who's currently receiving this deduction would simply have it evaporate.
As to the drop in home prices, it's hard to imagine it would be as dramatic as your example. Even if it were, it could be argued that the $225,000.00 price is a more accurate reflection of the value of the home. At the very least you'd know it's not a price that's been artificially propped up by the lure of a big tax write-off.

grandfathering mortgages in does not help the person who has to move and sell his house at a loss because of your change in the tax code and then not have the deductionn on their new place. Selling this property would FORCE a homeowner to reflect a loss on his home caused by a change in tax structure.

Never will happen ... Ever.

Posted 1 year ago #