Sadly, Jeffrey Dorfman’s Forbes article criticizing the mortgage interest deduction barely scratches the surface of its problems:
The mortgage interest deduction is one of the most treasured and fiercely defended features of the current U.S. tax code. Many in the real estate business worry that any tinkering with it will lead to major disruption in the real estate sector, further weakening an industry still trying to fully recover from the collapse of the real estate bubble in 2006. Yet, thanks to a new study out based on Danish data, many people are now wondering if there is anything positive about this tax break. While the debate is not settled, right now the answer appears to be no. The mortgage interest deduction is nothing more than rent seeking on behalf of the real estate industry. It confers no benefit to society as a whole.
Not only does the mortgage interest deduction primarily serve as a subsidy to builders, real estate agents, and bankers, to whatever extent homebuyers benefit from it the most well-off in the society benefit most from it. The top 10% of income earners capture 75% of the value of the mortgage interest deduction. In other words at best the MID is upper middle income rent-seeking.
Don’t expect Democrats, tribunes of the poor that they are, to fall in line behind the abolition of the deduction. Geographically, the greater the claims of mortgage interest deduction in an area the more likely the area is to be a Democratic stronghold. Massachusetts, Connecticut, and California are helped the most on a per capita basis, North Dakota, South Dakota, and Mississippi the least.
I can imagine a couple of “reforms.” The simplest would be to limit homeowner interest deductions to a set figure, say $20 thousand per year per household. Slightly more complicated, we allow larger deductions but restrict the purchaser to buying only one house or building. Or we might limit the maximum purchase price of the house being financed, say to $400,000.
I’ve watched such ideas get kicked out for consideration for must be forty years now, and they never get beyond magazine pages. I think everyone in Congress is on the take from real estate developers.
Everyone is on the take from real estate developers, and now a real estate developer is in charge. What could go wrong with that? Seriously, they should totally eliminate this, or set a maximum.
Steve
Turns out this is a reasonably live topic in the Trump era and there are some numbers. Current law actually sets a limit (“cap”) of $1,000,000 per year on deductible interest payments per taxpayer. It’s been proposed that this be cut to $500,000. This would increase federal revenues by about $60 billion per year according to the Congressional Budget Office. At the moment, yearly budget deficits run to several hundred billion, so this isn’t enough to make a huge difference.
The thing is, Trump has promised a tax cut. The idea had been that repealing Obamacare would cut federal expenditures 300 or 400 billion bucks or so, enough to enable a pretty large tax cut. But that’s now implausible, so the real estate interest deduction moves front and center.
Realtors and people in construction have mixed feelings about this it seems; on the one hand that specific deduction has always looked good to them, but they also benefit from customers who have bigger bank accounts, no matter what the reason. So … The thought is, a general income tax cut would contain a doubling of the standard deduction, so fewer folk would itemize their expenses and need to contemplate the reduction in the possible interest deduction. This would lessen much of the screaming from tax payers counting on that deduction.
It’s not often I find myself supporting Trump administration initiatives, so I suppose I should add this actually hasn’t been proposed (yet) by the White House; it’s an idea being pushed around by Republican Congressmen.
Claims to the contrary notwithstanding we are not undertaxing. We are overspending.