Fairness. Home Ownership Income Tax Deductions

Back in 79, I was spurred to by a home with a promise of a 50% deduction for mortgage interest by Joe Clark, the Canadian Progressive Conservative Leader who I helped elect. Only he reneged and was quickly dumped and I’ve never gotten a mortgage interest deduction since, except for the portion of my home I use for business.

But Americans have enjoyed this perk for much longer than that. Some Americans anyway.

American home owners can deduct mortgage interest for up to two homes, for up to a million dollars & deduct real estate taxes.

Now 31% of Americans don’t own a home. If you are black, over 50% don’t own their own home.

If you make a lot of money, you can arrange for higher deductions.

As far as I can tell, no other country has this type of income tax deduction.

How on earth is this fair to poor and lower income people? How is this fair to blacks? How is this fair to the non- home owner compared to his counterpart of equal income ? And most of all, why is this not a campaign issue?


Well it’s fairer to lower income people and families than not being able to deduct anything at all. Being able to deduct mortgage interest likely reduces how hight somebody has to reach in order to be able to afford to buy.

Of course if you look low enough on the income scales you’ll always be able to find a group of people who don’t make enough to be able to benefit from an incentive such as this. That doesn’t mean such incentives are inherently unfair.

How so?

Finance a more expensive home.

Oh. Okay. Assuming you had enough income to make the higher payment on the more expensive home.

I don’t see an issue with the mortgage interest deduction. Sure, it favors people who are financially able to buy homes, but there are many deductions that favor different groups of taxpayers. I don’t get a deduction for dependents, college tuition, child care, home office, moving expenses, alimony, union dues, work uniforms, health insurance, business losses, etc.

Without the home mortgage deduction, it’d be harder for many people to buy a home, and that includes low income and minority families who manage to become homeowners. Just because it doesn’t benefit everyone doesn’t mean it shouldn’t be available to anyone. Baby - bath water.

Don’t forget that the entire interest is not deductable, it’s only that portion that exceeds the standard deduction.

The standard deduction for couples for 2006 was $10,300. Anyone could deduct that right out of the box. I had a mortgage and moderate property and income tax liabililities, my interest deduction for that year was $7,047 dollars, my tax deduction was $7.693, so my deduction for those was only $4,440 more than the standard deduction, this on mortgage and interest payments of $14,740. It’s hardly a windfall.

But this does illustrate the unintended consequences of using the tax code as a form of social engineering. They determined that private home ownership was a social good, and set about using the property tax deduction to make it more affordable. It distorts the market. The good may outweigh the bad, but the bad can’t be ignored.

I don’t like the idea of the mortgage interest deduction, although I personally benefit from it.

I dislike the way that it distorts the house price market by making home ownership cheaper than it would be normally. I don’t see why the government needs to decide that home ownership is good and therefore worthy of subsidization. I think it stems from a “home owning nuclear families make for better societies” micro-managing mentality that I do not approve of. Let people live how they want to live.

That being said, now is probably not the best time to suddenly remove it. Once we have more stable house markets I think phasing it out slowly would be good policy.

In general, I am in favor of a more simplified tax code. I don’t mind the whole tax bracket system, but I do think a lot of the complicated deductions should be done away with (with a corresponding across the board deduction in tax rates if you wanted to remain revenue neutral).

Yeah, the purpose of a deduction is to incentivize a specific behavior. I don’t see any value in incentivizing people taking out mortgages, so I’m in favor of scrapping it. But it probably will never be done without some wholesale reform of the tax system.

Surely the market adjusts to the deductability by driving the capital price of houses up? It seems like great retail politics, because people perceive cash in the hand at the end of the year, but miss the hidden cost of market distortion.

I could see that happening in parts of the country, such as the East and West Coast, where geography, zoning and population density combine to effectively create a restriction in the supply of housing stock. But flyover country isn’t similarly constrained, since you can keep building cities and suburbs outwards.

We studied this in law school and I was totally blown away by the reasons for and against the home interest deduction. However, since I’m not a tax lawyer, I saw little reason to remember this since such reasoning isn’t on the bar.

One of the reasons was something to do with fairness. My memory is shaky on this (and every other point in my post, but please bear with me), but I believe the idea was to keep the taxes in this country somewhat progressive, but at the same time, allow an ease off the burden of home ownership.

Speaking of which, it also allows a greater mix of people in certain areas where homeownership is too expensive for less well-to-do people. The idea is that homeownership encourages responsibility and responsible communities. I am curious to hear arguments against this.

Having loans and mortgages also drive the economy and helps control inflation. If we’re going to allow people to deduct the cost of doing business, then the interest on money must also be deducted (this notion will be lost to people who do not believe that money works). Also, it allows people to use their house as a leveraged asset. Taking loans against the house encourages repair, updates, and stability. People wanting loans provides a price signal to the fed to know what to do about interest rates. Home loans were traditionally seen as something that only farmers went through. People preferred to buy outright, and it took a lot of arm twisting to get people to go to banks. Getting people to use banks helps the economy. Though, surprisingly, there really isn’t a great advantage to taking on a mortgage. It’s way more efficient to buy the house outright, i.e. minimize the interest you might otherwise pay to the bank. Paying off loans quickly also benefits the economy (well, just paying them back does, but quicker the better).

The real estate market is also more subject to whimsy and speculation than any other market right now, imo, as evidenced by the current dilemma. How many boom/bust cycles has California gone through? The home interest deduction helps people in both cases: during boom times, it eases the taxes assessed; during lean times, it helps the ease of the mortgage payment.

Lastly, and this has been touched on already, to eliminate this deduction would mean to eliminate a whole bunch of other deductions. The tax code is a complicated mess already (albeit in the interest of fairness). The only way to simplify it would be to make a flat rate, but of course, such a provision without modification would be pretty draconian. Deductions would have to be utilized, which would probably just lead to a version of the current tax code as it is now.

It’s pretty simple. The U.S. has decided, as a society, that home ownership is desirable, and thus subsidizes it.

In Canada, society has decided that universal health care is desirable…

Regardless of whether it is good social policy, I don’t think your “fairness” argument is really that big of a deal. Consider this: Everyone has to live somewhere, either in something they own or something they rent. If you are renting from a landlord, presumably, the landlord already deducts his mortgage interest as a business expense, and it being a free market and all, this saving gets passed on to the renter - think of it as a subsidy for the producer side of the rental accommodation market. So in that sense, allowing a mortgage interest deduction for individual home owners only balances out that.

It’s a rather contrived model, but the whole “fairness in taxation” thing is sort of contrived. Canada DOES subsidize individual home ownership in other ways, i.e. no capital gains tax on sales of primary residences, ability to use RRSP funds, etc.

Well, as you can see, most Americans own homes, running on a platform of taking away one of their major tax deductions is unlikely to lead to electoral success. I personally find that there has been a cultural shift in recent years with the world wide real estate boom - people today seem to be taking on much more interest in their houses than in the past, presumably because the boom has driven prices up so much that one’s home has become a central part of one’s life and identity. The popularity of various home improvement shows on television (so I’m told, I don’t have a TV) seem to be a product of this. I think that with the real estate bust, houses are going to become less central parts of one’s identity and more collections of 2x4s and stucco, like they were in the past. I’ve never really thought of them as being much more than that, although that viewpoint is understandably going to be unpopular amongst people who own houses.

To the extent that property taxes discourage home ownship, the market for homes will be undersupplied. To the extent that a deduction somewhere else will encourage home ownership, the market for homes will be oversupplied. The net result? Either too many or too few people live in a house. Such is life. Where are we?

I just read about a weird link between home ownership and unemployment. I can think of a few reasons for this, some nefarious, some not. Probably all of them are a little true. Signing a contract for something of the value of a house is a massive undertaking for most people. This is a very big financial obligation and it decreases geographic mobility, which may after all decrease economic mobility when one well dries up as another is tapped somewhere else. All these forces should find some kind of balance, overall, if everyone is negotiating on even terms, but that is a really, really big “if.” So unbalances outside the narrow view of the housing market might also distort the housing market.

I think one thing is for sure: we have no idea how many people should own homes.

Deductions are also reduced at higher income levels via caps and AMT…so its a middle class benefit. Someone making a million dollars a year is unlikely to see a significant mortgage interest deduction, even if he pays $100,000 a year in mortgage interest.

Except it doesn’t in theory subsidize it. Assuming the market works, reducing the amount an individual has to pay out of pocket to service a mortgage should simply increase the price of the property. If a person is willing to pay $2,500 a month for a particular property, and then the government offers to pay $500 a month for them, then they will be willing to bid up to $3,000 a month for the property.

The effect of mortgage tax relief is, in theory at least, a windfall benefit to people who own property at the time that the relief is first granted. Were it to be revoked, property should decline in value.

Of course, there will be winners and losers around the margins, because people pay different tax rates. But overall, the market should adjust to make this sort of thing an irrelevance over the long term.