Recently the President has proposed eliminating the Mortgage interest deduction for taxpayers in the top brackets, making over 250 thousand a year.
I’m not sure how likely that is to pass. But as I make less than that, my interest is in the disaster that would be my budget plan if they repeal it for us non-six figure making people.
What are the odds this will happen, that they will repeal the deduction for us poor peeps (e.g. 100k boys) in the mid range tax brackets?
It takes a special kind of idiot to want to increase the cost of not foreclosing on your mortgage in this economic environment.
If they ever repeal it, I think they’d have to continue it for existing mortgages, for the reason you mention.
I think they should phase it out, though. Its a more or less pointless market distortion costs the gov’t something in excess of a hundred billion in lost revenue.
I’m kinda skeptical that there are a lot of people making 250k a year who are so close to not being able to make their mortgage payments that the lack of this particular write-off would make the difference one way or another.
I agree, that would do a lot to mitigate the damage. The problem is that previous decisions haven’t shown this kind of foresight.
It doesn’t need to render people incapable of making their mortgage payments to be harmful, just unwilling. And a 50% increase in the effective cost of your mortgage is going to seriously affect your mental calculus as to whether the mortgage is worth it.
How do you get 50%? The top tax bracket is just something like 35%, and the deduction is just on the interest payments, not total mortgage payments. I can’t really see how it can add up to 50% of the total payments.
Plus, if you walk away from your mortgage, then you loose the deduction anyways. So I don’t really see how loosing the deduction would make you more likely to walk away.
$100 in post-tax dollars is worth $154 in pre-tax dollars*, not $135. So going from $100 pre-tax dollars to $100 post-tax dollars represents a 54% increase.
You are right about it only being a 49-54% increase in the interest component of the mortgage, though - I should have used a more precise term than “effective cost”.
*100 * 1/(1-0.35) = 153.8
Can you link to something that validates that statement? I’m guessing he wants to limit, not eliminate the deduction. I could be wrong, but it’s better to make sure we have have the facts straight before we debate something.
It will be almost impossible to eliminate it. As Simplicio said, we should eliminate it, but it’s too entrenched in our lives to be a politically viable option.
We should keep it. Removing it would make it more expensive to buy a house, and I believe home ownership is good for the economy. And the interest is already being taxed.
It was removed a while back in the U.K.; we adjusted.
Can you give us more details? What was it, and how was it phased out? What effect did it have on the housing market?
Also, I did some googling, and I can’t find anything that supports the OP’s claim about Obama.
You don’t think the mortgage deduction is factored into the price of homes? The market ain’t that stupid.
Its largely claimed by upper middle and upper class cohorts though, who presumably would just buy slightly smaller houses without the deduction. If you wanted to encourage home ownership (which I’m not sure is such a great idea in anycase, but anyways), it’d be far more efficient to take some part of the 100+ billion dollars a year in lost revenues from the Mortgage Deduction and use it for targeted programs to help people buy houses for whom the extra money will actually make a difference between them owning a house and not.
Eliminating the deduction would certainly drive home prices downward making them more affordable, if you have the money already. Unfortuneatly the effect on the overall economy will dimish the number of people who could afford any property, or even food.
I don’t really have time for debating, and I’m unlikely to sway anyone anyway. But let me explain my point of view.
Rents go up. The real cost of mortgages, if they are fixed-rate, goes down because of inflation. $X/month ten years ago isn’t as much as it is now. So as time goes by people have just a little bit more money in their pockets. Spending that money helps the economy. Also, I believe that people are more likely to spend money on a house they own, rather than one they rent. After paying rent, you’re left with nothing. After paying off a mortgage, you have a real asset.
I don’t have data, but I think most homes are not owned by upper-middle- and upper-class people. I reckon I make an ‘average’ wage, which is decent for where I am. I have a mortgage. Everyone I personally know who owns a house is the same. Unlike many people in the past decade, I bought a ‘right-sized’ house. That is, I put a limit on the price and looked for a house that fit it. But like most people, there’s not a lot ‘extra’ left over at the end of the month. What little there is is just enough to allow me to enjoy my hobbies (which support the economy). Without the mortgage deduction, my quality of life would go down and I’d put less money into the economy.
Of course then you would have people complaining about ‘buying houses for people who don’t deserve them’. I’m all for progressive taxation. I think that people with means should pay more, since they benefit more from living here. But raising taxes on the middle class while giving deductions to upper-middle-class and upper-class isn’t working. Do rich people benefit more from the interest rate deduction than less-rich people? Certainly. But I think eliminating the deduction altogether would do more harm than good. If the deduction must be reduced/eliminated, it makes sense to do it for the people for whom the percentage of their income is less. If that can’t be done, then it’s better to leave the deduction in place so that it doesn’t harm the people for whom the percentage of income it represents is greater.
The tax benefit is baked into the price of homes. Eliminate the tax deduction, and prices will go down accordingly. Maybe not a perfect match, because lots of people probably have an emotional attachment to the deduction that outweighs it’s actual value to them.
Interesting CNBC article on the subject
Mortgage Interest Deduction Big in Budget Play
If home ownership is a good thing, people should be discouraged from borrowing.
In Canada the interest isn’t tax deductible, but for certain incomes rent is.
English economist Andrew Oswald has shownthat across European countries, and across U.S. states, high levels of home ownership are correlated with high levels of unemployment. More conventional factors such as generous welfare benefits or high levels of unionization don’t explain unemployment nearly as well as the tendency to own houses. Renting your home and staying flexible do wonders for your chances of always finding an interesting job to do.
That sounds good in theory, but you have to consider that people currently own the house at the higher rate. Eliminating/reducing the deduction would drive their value down making things a lot harder on current owners. It’s not unlike a policy that would cause stocks to all fall 20%.
The issue isn’t who owns houses, its who claims the deduction. Most homeowners who make the average income or less don’t claim the deduction, because there is little incentive to itemize their returns. See the table here
You could use that to make an argument for making anything deductible. After all, people that rent apartments would no doubt like to deduct their rent payments and use the extra money to put into the economy as well. But presumably we need to tax something, and given that, its best to have a tax code that doesn’t distort the economy by favoring some purchases over others.
If we just got rid of the deduction and used the money to lower the income tax, then you’d have the same amount of money for people to spend, but you wouldn’t be advantaging rich homeowners over poorer homeowners and renters.
I see that we have had some useful posts while I was writing, but I’ll post this anyway:
I think we need some more data in order to discuss this question. I don’t have a good feel for the actual numbers involved, i.e. who benefits from this deduction and to what degree. I’ve never had a mortgage so I’m not entirely sure how large it would need to be to take the interest deduction over the standard deduction.
I’m assuming that the interest deduction only applies if you pay more in interest than the standard deduction (assuming no other deductibles.) That’s $11,600 in 2011 for married filing jointly, or ~$970/month. Anyone know how big a mortgage gets you interest payments of ~1k/month? Poking around a bit, it looks like ~$200k of debt ($300k house, 30% down) at ~4% will get you monthly payments around there, but I have no idea what percent of the payment is interest, and thus deductible.
Of course, eliminating or reducing the deduction wouldn’t completely wipe out the tax benefit for most folks, as they’d be able to still take the standard deduction. Again, that’s assuming no other significant deductions; I have no idea if that’s an appropriate assumption.
I don’t think it would be too difficult to eliminate the mortgage deduction on SECOND homes and I suspect that this will happen sometime soon.
I don’t think it would be too difficult to reduce the cap on the home mortgage deduction from a million dollars to something less than a million dollars (say the cap for conforming mortgages).
It was called MIRAS. I regret that it happened so long ago that I do not recall the effects.