Should The Mortgage-Interest Deduction Be Phased Out?

I know everyone paying a mortgage thinks it should remain. But I don't. I think it is VERY unfair. It is a subsidy to people wealthy enough to buy in the first place, whereas simple renters get no subsidy. And it really only serves to allow buyers to bid higher to buy a house, which doesn't really get them more house, only makes housing prices even higher. That is, in the end, it only leaves you with a bigger loan to pay off, undermining any subsidy you thought you were getting.

It only encourages people to buy more home than they can afford. The deduction was put in place for the extremely wealthy anyway. End it, and all tax deductions, now.

I agree but you would need to lower the tax rate to compensate for the elimination of the interest deduction. In the end, I don't want to pay more more taxes, as I pay more than my fair share already. Make it a revenue neutral reform of the tax code.

Well, I would not call it "paying more taxes." I would call it paying as much as I do -- you know, your fair share (I am not intending to personalize this comment, it is just generic language). Why should you pay less tax than me just because you decided to go into debt? And mind you, this is not really even just to buy a house necessarily, it is for any loan against the house.

For some reason, prior to the mid-1980s, all interest was tax deductible. I don't know when or how that came about. But in the 1980s, under Reagan, the deduction for interest payments was ended -- except for the interest on mortgages. That exemption for interest on mortgages was retained merely because of political considerations, with all the homeowners voting, and presumably not voting for fairness but for lining their own pockets. 

This exemption has since skewed lending so that people who have equity in a home now take out any or all their debt against the mortgage -- keeping their mortgage jacked up to the hilt -- and get the tax exemption, whereas someone else to takes out, say, a straight car loan from the bank or runs up debt on a credit card instead of a loan against a mortgage doesn't get the tax break. This is part of the reason any number of people who have been foreclosed on in the past couple of years had mortgage debt beyond what their recent circumstances could allow them to pay or to justify -- they had kept their mortgage amount owed as high as possible by taking out all their loans against it, and then found themselves among the layed off.

I don't think it fair to subsidize the mortgage even strictly for buying the house. I certainly don't think it fair that homeowners can have all their debt get subsidized while others who can't afford a home get no subsidy on their debt!

I think we agree. A renter should not have to subsidize a homeowner by paying more taxes. However, if nobody receives the deduction then I think it is fair to lower the rates for everyone to offset the increase in taxes, which would result from the loss of the deduction. That is what I mean by revenue neutral. Could not tell whether you agree with this or not.

Good points but I'll play devil's advocate.

With the housing bubble effectively deflated any suggestion to eliminate mortgage interest deductibility becomes mute as a remedy to cure the problem. Deductions based on tax bracket percentages is a losing proposition in terms of absolute cash flow. What benefit is realized through partial reimbursement of debt service expense on an asset class with a declining value trajectory? Leverage opportunity is non-existent.

Additional disincentives to purchase real estate will only serve to further depress home values in the short term which affect every home owner and the economy as a whole. I agree the elimination of interest deductions except for mortgages singly benefited those qualified to purchase a house, which after 1998 wasn't strictly defined as a wealthy class. Years ago home ownership was determined to be in the national economic interest until Fannie, Freddie and Franklin Raines gamed the system and perverted the concept via powerful lobbyists with huge personal and political agendas. This article provides some statistical background of their excesses.

Before the bust most of those who couldn't afford to purchase a home and "reap" the benefit of mortgage interest deductions were net tax recipients under the tax code. I see no reason to provide even greater disequalibrium in income redistribution before a thorough cleansing of the entire system.

Lou: what you are saying works for me as being fair. But whether it is better policy for taxes for all to be equal (that is, in the sense of the mortgage interest subsidy), or raise taxes for those who have been getting the subsidy to be equal with the rest is another matter -- especially when a huge deficit is being run. But either way would be fair tax treatment.

CraigPD: My sense for decades is that real estate has been gamed, not just lately with Fannie, Freddie and whatever. For instance, when they changed the allowed length of mortgages in the latter 1970s from 20 years to 30 years, that was gaming it. That was argued to allow more people to buy, but of course that is not what it did, it only allowed higher prices to be charged, requiring ever more debt to be taken. And there has been one such measure after another for decades. The lending schemes in the past decade were merely the latest, not the only such. There has even been talk in recent times of changing mortgages to be 40 years -- more gaming! We endlessly keep pumping up the price of housing with one scheme or another.

A $150,000 loan would only give you a $6000 deduction on a 4% loan. The standard deduction for this year is around $11,600. Why anyone would go in debt for this reason is beyond my comprehension. You would need another $5600 just to get to the point you would receive for a deduction anyway.. You would only benefit from the amount you would be able to deduct over $11,500 or whatever it is this year. Even with property taxes, state or sales taxes it would not be worth it for the added insurance, maintenance, updating etc. It would very hard to get above the standard deduction for a married couple unless you bought a very expensive home. You buy a home for your own family needs. There is not a big benefit for a normal size loan. I believe the housing mess started in the late 90's when Congress decided to change the tax laws. You no longer had to pay income tax on the money made in the sale of your home if you lived in the home 2 of the last 5 years and the profit was less than $500,000 per couple when you sold.  This escalated the sales of fixer uppers and a lot of income that was no longer taxed. The speculators and those that had the skills to update homes made a lot of untaxed money. To lose the tax deduction will not harm the largest segment of the population. To be able to deduct 25% of the allowable deductions over the standard amount would be minimal. In the 25% tax bracket you would save $1 for every $25 that you deducted over the standard amount.

Well, your calculations might work in the few areas of the country with very low housing prices. But in most places, simply your interest writeoff plus your property taxes plus state income taxes paid will make it worth itemizing, not to mention health insurance costs, or other.

But at any rate, you are saying it hardly matter, amounts to little to nothing, so drop the exemption.

And yes, that change to exempt the first few hundred thousand dollars of gains on housing from the capital gains tax is another of the methods of gaming housing sales/prices to which I was referring. That's another tax exemption that should be eliminated. I have to pay capital gains from my first dollar on my mutual fund -- and my money is there because I was too responsible to jump into the housing bubble with loans no one could ever afford and prices way higher than anything justified. Why should someone who in invests in -- and thus pumps up the price of -- housing be exempt from tax on earnings when nothing else is?

that change to exempt the first few hundred thousand dollars of gains on housing from the capital gains tax is another of the methods of gaming housing sales/prices to which I was referring.

The gaming didn't begin in earnest until after 1997 with the repeal of the old "rollover residence replacement rule" and the "over 55 rule" where a once-in-a-lifetime event became per-sale jackpots.