Who Needs the Mortgage-Interest Deduction?

[J_Snow]

http://www.nytimes.com/2006/03/05/magazine/305deduction.1.html?ex=1299214800en=e789e97b669d2f 3fei=5088partner=rssnytemc=rss&pagewanted=print

Its a lengthy article but I found it pretty interesting...

[jq26]

I took my federal tax law professor to task on this issue. Primary residence mortgage interest is attributable to 100% personal consumption and in a pure tax world, that should be 100% taxable and NOT a write off. But good tax policy and economic policy are different. The feds made the decision that they'd help subsidize ownership a long time ago and so here we are. The flipside of that is that it does create price points that are artificially high- great if you own but not so great if you are still trying to own.

But look at employer provided healthcare coverage, life insurance disbursements, and even compensatory damages from lost wages due to physical injury. All excluded from gross income. A good tax policy of taxing this money is trumped by social policies not to. Even for businesses, accelerated cost recovery schedules that are totally devoid of economic reality are a way to prmote investment and business. Another example of tax policy being trumped by a higher goal.

Also, as far as I know, interest for personal investment purposes (ex: buying stocks are margin) is also deductible. So the comment from Joel Slemrod about stockbrokers not getting a handout doesn't really make sense. You buy a house on credit and you get to write off the interest. You buy stocks on credit, you get to write off the interest. You buy either the house or stocks with cash and no write off for either. I fail to see his point.

What is troubling is the unfairness of home equity loans to buy items on credit that are then considered tax-deductible. Non-homeowners don't get this advantage and so when they buy the same item on credit, the interest is paid in after tax dollars. Doesn't make much sense-

Great article!

[Methuss]

I took my federal tax law professor to task on this issue. Primary residence mortgage interest is attributable to 100% personal consumption and in a pure tax world, that should be 100% taxable and NOT a write off....

You buy a house on credit and you get to write off the interest.


Interest on a house is not "personal consumption." That's rediculous. The personal consumption is the cost of the house, the principal. Plus there is property tax to look at which can be 4-8% of the home's assessed value annually (mine is over $6300 a year on a $300k house!).

Frankly I fail to see how ANY interest paid can be "personal consumption" because it is not a material good or service. The service in credit is perfomed during the transaction only. After that the interest paid by the consumer is a recurring fee with no service (by definition) provided thereafter.

[jq26]

Frankly I fail to see how ANY interest paid can be "personal consumption" because it is not a material good or service.That was why ALL interest was originally considered deductible. Then as part of Reagan's "broaden the base and flatten the rates" tax reforms, he proposed that all non-business interest was not deductible. The housing industry had a fit and so you now you see the result. In addition, there was more of a social reason to subsidize housing than there was to subsidize boats, cars, and other financed goodies. But the exclusion of income of interest is a tax expenditure and the annual pricetag of this exclusion is in the 10s of billions. I just read a law review article that had quoted the department of revenue figure- somewhere between $50 -$150 billion. If you see how that is skewed towards high earners and promotes consumption, then there is an argument to be made that it is a regressive program. Especially since interest on BOTH a primary residence and a vacation home are deductible.

Regarding consumption, I am talking about the broad tax definition of consumption. GI = savings + personal consumption. Healthcare, housing, rent, cars, food, etc. are all personal consumption. If you earned it and didn't invest/save it, you personally consumed it.

Besides, when Buyer 1 buys a home and pays a massive mortgage and Buyer 2 buys a much smaller home with a proportional smaller mortgage, Buyer 1 has a much higher consumption level. The vast majority of that consumption was with financing. Therefore, his interest payments are attributable to his level of personal consumption and so become part of it. Just like the interest on my rental property and your rental property is a business expense because it is attributable to the cost of producing income.

Also, when you purchase something with money you don't have, the cost of the money (interest) should be imputed into the price of the good. Or at least so I'm told.

Regarding taxes, the same rule would apply. The highest incomes typically pay the highest taxes and so the ability to itemize property taxes is also regressive. Personally, I think taxes are enormously too high for EVERYONE and the real answer is to severly reduce the size of the government, especially the federal beast. But these types of tax deductions are hard to defend purely on tax policy alone.

Of course, all of this is a moot point as more and more people are no longer to write off mortgage interest or real estate deductions due to the AMT.

Anyway, great article.