The home mortgage interest deduction is very close to what you might come up with if you deliberately set out to create the worst form of housing subsidy you could devise. It's ludicrously regressive, it promotes debt over equity, it encourages overdimensioned houses and greenfield construction, and it creates friction in the labor market. The only thing that could make it worse is if you could deduct the mortgage interest on a vacation home -- which, as it happens, you actually could until the 1986 tax reform. (In return, home owners got very generous capital gains treatment).
Given the sacrosanct character of the mortgage interest deduction, I'm not hopeful that it will ever be reformed. But if it were, I'd like to see it transformed roughly as follows.
First, the value of the deduction is standardized at the same rate for all taxpayers -- let's say 25%. For the people in the 15% (or 0%) bracket, this is a big improvement. For the higher tax brackets, the deduction will be worth a lot less. Existing mortgages would be grandfathered.
Next, a new program is introduced that provides a tax subsidy on the front end -- the savings for the downpayment. Every penny you put away in your "American Dream Account" gets the same treatment: your taxes are reduced 25 cents on the dollar, up to a fairly generous limit (lets say up to the 85th percentile home value nationwide). In fact, let's make it more generous than the mortgage interest deduction -- say, 30 cents on the dollar.
Your American Dream Account has 401k like features; employers can give you a tax-advantaged matching contribution, you pay back taxes plus penalty if you withdraw it for something other than making a home purchase, etc.
Meanwhile, the mortgage interest deduction continues to exist, but you can only take advantage of one or the other. If you open an American Dream Account, you cannot qualify for mortgage interest deduction EVER.
So how does this play out? Young people save up for their downpayment with the help of very generous tax subsidies. When it comes time to buy a house... hmmm, it will cost a lot more to pay mortgage interest than to continue saving for the downpayment. Maybe we should wait until we can pay 60% down instead of 50%.
Once the new homeowners are finally esconced in their suburban castle, the gravy train comes to an end. There is no taxpayer subsidy for taking out a bigger mortgage to "trade up" (though you could continue to contribute to an American Dream Account up to the legal maximum).
A generation later, once 90% of homeowners are ineligible for the mortgage interest deduction, you put it out of its misery for good.
I might add that my housing subsidy proposal would make it a lot easier to monkey around with liberal social engineering and environmental sustainability schemes. Remember how Bush mocked Gore for his rooftop solar tax credit in the 2000 race? With the American Dream Account, there is a ready mechanism for funneling subsidies into Green construction or high density transit corridors or Sharia-compliant miscegenated communities or whatever you want to favor. At the moment the American Dream Account is redeemed for a home purchase, the government kicks in an extra $3,000 (or whatever sum is appropriate) if the purchase meets certain criteria (e.g. LEED certification).
Perhaps better (since it avoids the need for any kind of appropriations) would be to make it so that the government claws back $3,000 or $5,000 or $10,000 of the public subsidy at the moment of redemption if the house does not comply with the standards.
home-ownership incentives in the US distort peoples' perceptions about how wealthy they are, and said people vote against their own self interest as a result.
Margaret Thatcher was fairly open that her policy of encouraging council houses tenants to buy their dwellings was meant to make them identify more with the rights of Property and vote Conservative. (This was also the implicit goal of G.W. Bush's "ownership society".)
My anecdotal impression is that Thatcher's policy was a bust, at least as regards London neighborhoods. Privatization of council houses facilitated gentrification by young professionals, which left those neighborhoods in the hands of Lib Dem and New Labour sympathizers. I can imagine this isn't broadly representative of the country, though. Maybe one of the UK'ians can comment more knowledgeably.
personally, i'm more annoyed at the shitty insulation in my apartment.
Doing my taxes also made me angry about the mortgage interest deduction, but for a different reason. The Alternative Minimum Tax made it almost worthless. Fuck you, AMT!
The Alternative Minimum Tax made it almost worthless. Fuck you, AMT!
First World top 2% problem.
I was thinking about the mortgage deduction last night (unrelated to my own taxes, which I haven't gotten around to doing yet), and I think it can be gotten rid of, along the lines of Knecht's item one. Announce we're going to get rid of the tax penalty for owning your home outright, and then replace the mortgage deduction with a fixed "housing" deduction. Make the deduction high enough, and the politics of it aren't too bad.
I think that "sacrosanctness" is basically a myth. Voters will forget anything if you give them long enough. I think the Republicans recognize this -- how much credit do they get now for passing Medicare Part D, for example -- which is why they're eventually going to succeed in destroying the welfare state one of these years.
I think that "sacrosanctness" is basically a myth.
If so, it's a self-reinforcing myth. The Simpson-Bowles Commission wouldn't touch it, despite a lot of speculation to the contrary.
how much credit do they get now for passing Medicare Part D?
There's an asymmetrical response to being given something versus having something taken away. Note how the the Dem's messaging to defend the ACA featured how the Republican repeal proposal would re-open the donut hole in Medicare Part D.
Margaret Thatcher was fairly open that her policy of encouraging council houses tenants to buy their dwellings was meant to make them identify more with the rights of Property and vote Conservative.
Rather famously, Conservative run Westminster Council's approach to council housing privatisation had a more direct link to gaining Tory votes.
9: Huh. I was not aware of that.
Coincidentally, the very council housing block I was thinking of when I wrote that comment is in Maida Vale, one of the three marginal Labour wards targeted in the scandal.
I do get a rent deduction on my State income taxes in Massachusetts.
Man, I miss the days of making money making enough money to complain about the AMT.
1
Why replace the home mortgage interest deduction (which at least is fairly simple) with a convoluted scheme like yours which still favors home ownership over renting which is what Stanley is complaining about?
Why replace the home mortgage interest deduction (which at least is fairly simple)...
Actually, it's not especially simple, once you factor in things like the rules on deductibility of HELOC interest, origination fees, and mortgage insurance, not to mention the complications due to the effective phase-out through the AMT per Halford above.
...with a convoluted scheme like yours...
My scheme is very loosely modeled on the German Bausparvertrag, which isn't especially complicated in practice. Among other benefits, my system would encourage the mortgage market to operate at much higher downpayment levels (as the German market does -- a major reason Germany didn't experience a housing crash) without unduly excluding lower income groups from the hope of home ownership.
...which still favors home ownership over renting which is what Stanley is complaining about?
It favors home ownership (which is a widely accepted, though not necessarily unassailable policy goal) without favoring home owners. The benefits would accrue equally, or even primarily, to renters who aspire to one day purchase a home, once their lives and finances are stable enough to make it worthwhile. That's a big difference.
14
It favors home ownership (which is a widely accepted, though not necessarily unassailable policy goal) without favoring home owners. The benefits would accrue equally, or even primarily, to renters who aspire to one day purchase a home, once their lives and finances are stable enough to make it worthwhile. That's a big difference.
It continues to prop up housing prices which obviously favors home owners at the expense of aspiring home owners.
I would like to see some social engineering that created stronger incentives to build multi-family dwellings fucking apartment buildings, especially ones with units with 3+ bedrooms. That would take a lot of the pressure off people to buy a house merely because they decided to have a kid or kids. And it would be better for the environment. And it would allow for more flexibility in the rental market.
I am particularly incensed every time I see one of those ticky-tacky Habitat for Humanity houses going up in a central core neighborhood, when what so many working-poor people really need is a better apartment. It's a waste of space, the buildings are shoddily constructed (no more so than most McMansions, I grant you, but that's not saying much), and it perpetuates anti-community values.
W/r/t the mortgage interest deduction, I doubt I'll ever be able to take it. Having no kids, or weird financial shenanigans, and a fairly small mortgage balance with a relatively low income for a homeowner, it doesn't look like it will ever make sense for me to itemize. So I'm essentially penalized for being prudent and frugal in my house-buying practice. Typical.
It continues to prop up housing prices which obviously favors home owners at the expense of aspiring home owners.
Personally, I could live with a world in which the mortgage interest deduction was phased out without replacement. But if there is going to be public subsidy for home ownership (and our polity seems supportive of that principle), I would prefer to see it restructured in a way that makes it more progressive and more supportive of saving rather than borrowing. My proposal does that.
I would also contend it would reduce the distortion of the housing market versus the status quo, because it would penalize the extravagant home purchases that drive the "housing as a positional good" dynamic.
17
... But if there is going to be public subsidy for home ownership (and our polity seems supportive of that principle) ...
The subsidy isn't really about home ownership but about keeping housing prices high which of course existing homeowners favor. Which doesn't mean it is good policy.
I bought into the idea that owning a home is some big important goal of adulthood. This was not a disaster in the "I wasn't ready and I'm going to lose my home" way; it was just a disaster in the "it made me make some compromises that weren't worth making and now I am kind of saddled with this place" way.
It's complicated in New York, though--it isn't all about the myth. Sometimes buying here, if you can, seems like the only way out off the crazy ride of ever increasing rents. My $1300/mo small studio (in a neighborhood I liked) was going to go to $1400/mo after one year and there was no reason to believe it wouldn't go to $1500 or $1800 the next year if it suddenly became trendy to live on the offramp of the Lincoln Tunnel. My options were 1) leave the city and go somewhere sane 2) try to find a stabilized apartment I could afford, which would be really hard and still the rent goes up a fair amount given that it's a small percentage on an already enormous amount, or 3) figure out a neighborhood that's inconvenient or boring or shabby enough (I hit the trifecta!) that people aren't snapping up housing and a small studio is within reach for buying.
The myth, for me, was directly propagated by my parents, who insist on it still. But then they also helped greatly with my down payment* so who am I to complain?
I'm me to complain, that's who! And in what moral universe does it make any sense that a house costs more than anyone you or I know is ever able to pay, and that instead you have to sign up to pay vastly more than the worth of the place to a floating eminence that exists to make money off the fact that [go back up this sentence, start from "that a house costs" and keep reading. Disengage from this loop after a while.]?! This is one of those Things That Just Are That Way that I can't get past the wrongness of.
Next on Mister Smearcase Channels Andy Rooney: I whine about my student loans.
*which was five dollars
The subsidy isn't really about home ownership but about keeping housing prices high
What are you talking about? The mortgage interest deduction long predates any concern about propping up the housing market. It's a means of tilting the individual rent-buy decision in favor of buying.
This post made me face not having started my taxes yet. Off to a great start, ordered the wrong item from Turbotax and had to cancel, realized I restaged this computer and may not have saved last year's return (all sorts of crap is safe and sound, however) and reaffirmed that the new printer I bought against the advice of wife and daughter is indeed a fucking piece of shit.
I'm awash in first world problems.
My progress on my taxes so far consists of trying to print out a 1040 and getting a mysterious error message on the printer.
My progress consists in my realizing that I can't find the 1099 my bank sent me.
||
Hey people with more statistics than I know of: what's a decent way to asses significance of positions in a ranked list? My populations are small and no good information is available about their distribution, but that's life.
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I have heard, and I don't know if it's true, that the mortgae interest deduction was added to create parity between people buying investment properties, who could always deduct interest, and people who were buying to live in a house.
I also had the experience of realizing, the first year that I was eligible for the mortgage interest deudction, just how messed up it was. For me, like natilio, owning half of a modest duplex, it gave me almost no benefit compared to the standard deduction. But it would obviously be quite valuable to someone who earned more and owned a more expensive house.
I can't wait to someday have normal well-defined taxes. It's confusing being neither employed nor self-employed.
Though one pleasant discovery this year: you no longer have to play self-employment tax on money spent on health care premiums.
26: I'm pretty sure the mortgage interest deduction was created with the original income tax in the 1910's, back when mortgages were something only businessmen used.
But maybe that was the intention when it was reformed in 1986.
24: Are you looking for the Mann-Whitney U test?
|| No more masturbating to Sidney Lumet. |>
31:That brought tears. One of the best of my era, great committed politics, great entertainment, great artist.
30: hmm, I briefly looked at that but am still not sure. Reading more that might be it.
Not listed in the IMDB obituary but very good:The Hill (early Connery, experimental style) and The Deadly Affair (Mason as lead in a solid Le Carre)
More chancy, but interesting:Stage Struck, The Fugitive Kind, The Offence, and Lovin Molly (Hey, Blythe Danner, what can I say)
20
What are you talking about? The mortgage interest deduction long predates any concern about propping up the housing market. It's a means of tilting the individual rent-buy decision in favor of buying
The mortgage interest deduction was not created with any intent to affect the housing market, it was a natural consequence of the fact that all interest paid used to be deductible. It remains as a means of propping up housing prices, it does not for the most part make housing more affordable as the benefits of the deduction are offset by higher prices.
it does not for the most part make housing more affordable as the benefits of the deduction are offset by higher prices.
That would be true if and only if housing supply were completely inelastic, which it manifestly is not.
it was a natural consequence of the fact that all interest paid used to be deductible.
...which hasn't been true for decades. When the deduction for consumer interest was eliminated, Congress made a couple of explicit exceptions: specifically the interest related to investment activities (e.g. interest on margin accounts) and interest on home mortgages. The rationale for the latter exception was and always has been that it's meant make home ownership more affordable for home buyers.
I just filed my taxes online using Free Fillable Forms. It was relatively easy, as these things go, although it would have been easier if they hadn't mysteriously had no record of me even though I used it to file last year.
And, of course, all this complaining about the mortgage interest deduction is music to my ears.
36
... The rationale for the latter exception was and always has been that it's meant make home ownership more affordable for home buyers.
That's just the stated rational. As is often the case with legislation the actual reason people support it is different. This support comes from people (existing home owners, real estate agents, real estate speculators, home builders etc.) who benefit from high home prices. Congress cares more about these people (and their campaign contributions) than aspiring homeowners who tend to be poor.
Doesn't the mortgage interest deduction basically flow directly into the banks' coffers?
Oh sure, read to the end of the thread and i see that F has already said what i wanted to ask. If we got rid of the mortgage interest deduction, wouldn't that put pressure on banks to reduce mortgage interest rates? (Not that there's much room for reduction these days...) And, actually, if banks had to drop rates, they'd also have to be much more cautious about whom they would loan to to ensure loans stayed profitable, right?
40
Doesn't the mortgage interest deduction basically flow directly into the banks' coffers?
No, it basically goes to home sellers. It allows people to take out bigger mortages increasing what they can pay for houses.
41
... If we got rid of the mortgage interest deduction, wouldn't that put pressure on banks to reduce mortgage interest rates? ...
No it would put pressure on home sellers to reduce their asking price to what people could afford without the tax benefit from the deduction.
@James
I guess my model is that to a first approximation, the mortgage deduction uniformly increases home prices because people can afford higher monthly payments associated with a higher home price.
So in that model, the mortgage deduction was already in place in the previous sale, so the profits realized by homesellers should be minimally impacted.
On the other hand, it convinces people to pay more in interest than they ordinarily would/could, which goes directly to mortgagers and banks. Perhaps not with perfect elasticity, but probably still significant.
Also, real estate agents capture a fraction of it because they get a set percentage of the costs.
I am not a mortgage expert, but it looks like the majority of the cash flow in the real estate market is captured by banks, mortgagers, and real estate agents. Even at current low interest rates, the total amount of interest paid on a 30 year mortgage is nearly equal to the principal.
Furthermore, they say the majority of homeowners refinance in the first 7 years, a time where interest costs are more than double the principal.
Keep talking, F. Seriously.
Yes, sure, the interest deduction impacts selling prices. But to jump from there to the conclusion that its therefore does not affect rates seems a shallow inclusion, indeed.
or even a shallow *con*clusion. it's nice enough out to dig holes and drink beer in the backyard.
44
I guess my model is that to a first approximation, the mortgage deduction uniformly increases home prices because people can afford higher monthly payments associated with a higher home price.
So in this model (which is as you say just an approximation as the mortgage deduction is worth different amounts to different people) eliminating the mortgage deduction would uniformly decrease house prices because people could not afford as high a payment if they were not getting part of it back on their taxes.
So in that model, the mortgage deduction was already in place in the previous sale, so the profits realized by homesellers should be minimally impacted.
No, their profits would be down because they would have bought at the higher prices induced by the deduction subsidy and are now selling at the lower prices induced by the removal of the subsidy. It is this loss of value for existing home owners that makes the subsidy so difficult to remove.
46
Yes, sure, the interest deduction impacts selling prices. But to jump from there to the conclusion that its therefore does not affect rates seems a shallow inclusion, indeed.
Well currently the government is guaranteeing most home mortgages (another subsidy to prop up housing prices) so mortgages rates are tied to interest rates in the entire government bond market. The reduction in demand for home mortgages would have only have a minor effect on this market (which is heavily influenced by the Federal Reserve in any case).
I was offered the chance to do some consulting on the side this year and the first thing I thought was what a pain that will be on my taxes.
41, 44, 45: Banks don't make money on the absolute interest rate they charge, they make money on the difference between that rate and their funding costs (e.g. what they pay to depositors). The best interest rates available generally correspond to banks' own cost of funding. The bank is indifferent between borrowing at 4% and lending at 5%, or borrowing at 6% and lending at 7%.
Of course if volume goes down, banks might cut rates a little to try to attract more business, but they have limited ability to do so before it just stops being profitable to lend.
The mortgage interest deduction does affect bank profits, though, by affecting the total volume of their business: when borrowers take out bigger mortgages to buy (or get cash out from) more expensive houses, the total amount of debt on which banks earn a spread increases. So Bank X, instead of earning a profit of, say, 1% X $100,000,000 = $1,000,000, might be able to earn a profit of 1% X $150,000,000 = $1,500,000.