Budget Deficit

The Myth of the Middle Class Mortgage Deduction

The mortgage interest deduction no longer primarily benefits the middle class

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Conventional wisdom has it that without the ability to deduct mortgage interest from federal taxes, homeownership rates and housing prices would tumble. Worse, middle class families would be relegated a fate worse than foreclosure: renting. Two decades ago, these dire predictions may have had some relationship to reality. But in recent years, the middle class has seen its share of the mortgage interest deduction (MID) steadily erode, undermining the political case for retaining the subsidy.

In 1991, households earning near the inflation-adjusted median income of around $50,000 were 48 percent of those benefiting from the MID (see nearby chart). That share has fallen to 30 percent in 2009, while at the same time the portion of households claiming the MID with six-figure salaries or higher has tripled from 13.5 percent to 41.5 percent.

What caused this trend? The answer lies in understanding who really benefits from the mortgage interest deduction, and how much the specialized subsidy is worth.

In 2009, only one-fourth of taxpayers in 2009 claimed the mortgage interest deduction. And this has been a relatively stable historical trend, with between 21 and 26 percent of taxpayers claiming the MID each year since 1991. Of those few who do benefit from the MID, most are households in the top income brackets and younger individuals with large mortgages ?who have not paid off much of their loans. Families where the head of household is between 25 and 35 years-old with incomes over $250,000 have, on average, a $7,711 deduction from mortgage interest, compared to a similar household with earnings between $40,000 and $75,000 a year, and taking an average $571 deduction. Meanwhile, low-income families, seniors, and Americans without mortgages gain virtually nothing from the program.

Many Americans believe the mortgage interest deduction allows them to deduct their entire interest payments from their tax bills—and make home purchasing decisions based on that misunderstanding. Instead, the MID lowers taxable income. Tax bills are lowered, but that's a much smaller benefit.

When considering the actual tax savings of the mortgage interest deduction, the benefits to the middle class become even more meager. The average tax savings for households with income between $40,000 and $75,000 is just $152 a year. That's $12.66 a month. Compare that to the highest earners, those making $200,000 or more, who see an average of $1,862 a year off their tax bills because of the MID benefit.

One reason often cited for preserving the mortgage interest deduction is the belief that it helps increase ?the homeownership rate. But as it turns out, the MID is an inefficient tool for increasing homeownership. Since 1994, the homeownership level has gone from 64.2 percent up to 69.2 percent ?in 2004 and then down to 66.4 percent today. The recession and collapse of the housing market is largely responsible? for the decrease in homeownership. If the mortgage interest deduction were driving people to buy homes we would expect to see some correlation between homeownership rates and the use of the deduction, but we don't. The total mortgage interest deduction subsidy has grown from roughly $50 billion to $80 billion since 1994 with little impact on homeownership levels.

This is because those households that rent but would prefer to own a home—if they had just a bit more financial flexibility—are typically low-income families. And if they bought a home they would be much less likely to itemize their deductions and claim the MID because they are low-income in the first place. For median income families that do itemize, a $12.66 per month tax savings is not likely to be the difference between affording a mortgage payment and renting. As a result, rather than increasing the homeownership rate, the primary impact of the MID is to increase the amount spent on housing by consumers who would likely choose to own a home anyway, subsidizing spending on housing rather than homeownership.

The MID also encourages housing consumers to use debt rather than their own assets to finance home purchases. And by creating favorable tax treatment for housing compared to other investments, the mortgage interest deduction encourages individuals to over-invest in housing, arguably one of the main causes of the recent housing bubble.

But wouldn't eliminating the mortgage interest deduction amount to tax hike? In fact, the impact would be limited, since 75 percent of Americans don't even claim the deduction each year, meaning the vast majority of people will find their tax bills unchanged. 

In a new study I co-authored with economist Dean Stansel, we calculated that if an MID repeal were combined with a proportional reduction in tax rates to make it revenue neutral, average rates could be reduced by 8 percent for everyone. The majority who don't use the mortgage interest deduction would see a tax cut and the few that do would not see too dramatic an increase in taxes.

The original goal of the mortgage interest deduction was not to help the middle class or promote homeownership. It is an accident of the tax code, left over from the original institution of the income tax in 1913, and deliberately ignored during President Reagan's tax reform in 1986 for political reasons. A revenue-neutral change would benefit all taxpayers in the form of lower rates and less distortion while the limited adverse effect of the elimination of the deduction subsidy would only pertain to a few. There is no reason to keep it in the tax code, and plenty of cause to remove it.

Anthony Randazzo is director of economic research at Reason Foundation and co-author of the new study: "Unmasking the Mortgage Interest Deduction: Who Benefits and How Much." A copy of the fully study (PDF) and a four-page summary (PDF) of the study can be found at Reason.org.

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180 responses to “The Myth of the Middle Class Mortgage Deduction

  1. About that chart. First, p + q == 1. Don’t draw two lines for one thing. Second, are those constant dollars? Because you don’t say they are. And if they aren’t, pftzt.

    1. Nope p + q != 1

    2. About that chart: making it link to a big version of the graphic would be nice.

    3. Correction: p + q + r = 1, where r covers incomes from 75k$ to 100k$.

      1. Presumably there are a few mortgage holder with household incomes (as defined by the tax code) under $40,000 as well.

        But then I image that they are mostly in rural areas in fly-over country.

  2. This just in: Reason contributor would rather the state get $152 than the citizen have it.

    1. This just in: Reason contributor would rather the state get $152 than the citizen have it.

      Because it mostly benefits the middle class rather than lower income people! Did Tony write this piece?

      1. “But wouldn’t eliminating the mortgage interest deduction amount to tax hike? In fact, the impact would be limited, since 75 percent of Americans don’t even claim the deduction each year, meaning the vast majority of people will find their tax bills unchanged.”
        But some people would find their tax bills increased and therfore it is a tax increase.
        How about a flat tax of 10% for EVERYBODY!

      2. I pay about $140 for my accountant to prepare my taxes. No income, $6,000 taxes, $125 in dividends. It’s not worth it. Not this year. Come get me.

    2. Right, because it’s totally fair to give a tax break only to people who do things the state likes.

      1. I’ll happily give up my MID if the 47% who pay no federal income tax start paying.

        1. Everyone pays the same percentage. No deductions, no exemptions, no credits. No social engineering, no vote buying.

          (Although any candidate seriously proposing the destruction of the United States Tax Code probably has bought my vote.)

          1. Everyone pays the same percentage. No deductions, no exemptions, no credits. No social engineering, no vote buying.

            Yes

            1. Add a no-taxes-on-the-first-30k clause and I’m in too.

            2. Only if the max tax is 10%.

          2. This.

            Long ago, the tax code was just seen as a revenue source. Now it is equally valued as a way to pay back your supporters, and micromanage people’s lives.

            1. Now it is equally valued as a way to pay back your supporters, and micromanage people’s lives

              Given the current state of our finances and economy, I’d say the tax code is now primarily viewed as this.

          3. Hey, I think I heard someone else say this. He was super good-looking, if I’m not mistaken.

          4. I’m fine with a deduction-less flat tax, but I don’t think the lower 47% are going to change. Just because they pay in, doesn’t mean they become a net taxpayer if they still receive more than they pay in in the end.

            In fact, people that aren’t going to pay any taxes, I’d rather see them not have witholding at all. Running that money through the government money filters just means that more bureaucrats get a pay check.

            (Of course, withholding is itself a corrupting concept and should be abolished.)

            1. Of course, withholding is itself a corrupting concept and should be abolished.

              You have gone too far, sir.

              1. I believe we have Uncle Miltie to thank for this during WW2.

            2. One vote for each net tax dollar paid – at every level.

              If 18% of my income counts as much as someone else’s non-‘contribution’ towards how (and who controls) that money’s use on election day…I’m displeased.

          5. Drive a stake through its heart – repeal the 16th Amendment.

    3. Gillespie or Welch should be embarassed to have this article associated with the magazine/website.

      The original goal of the mortgage interest deduction was not to help the middle class or promote homeownership. It is an accident of the tax code, left over from the original institution of the income tax in 1913,

      So it’s OK for businesses to deduct interest as legitimate expenses, but not households? How is that an accident? Where is the logic in that? The ‘accident’ is how households got fucked by Saint Ronald by making all other interest non-deductible.

    4. The mortgage interest deduction eliminates double taxation!

    5. When you pay more in taxes, without and increase in income there has been a tax increase!

  3. I’m not buying it. I’ve already been driven out of my house and forced to rent it because of the bad economy, yet now you want to take the one benefit I get from not defaulting on my mortgage? Screw that. I’m barely hanging on and trying to recover. Enough already. I’ll vote against any politician who tries to take this away.

    1. If you’re renting it out, you get to deduct your full carrying costs as a schedule C business expense.

      1. Schedule E, and just interest, not principal, but yes. Getting rid of the Schedule A deduction wouldn’t necessarily change rental expenses.

      2. I do and also deduct the interest from my mortgage as I’m allowed to do. I can’t afford to give that up right now. I’m not asking for a government handout or even a bailout on my mortgage (it’s fixed at a low interest rate). I just want to keep more of my own money to recover from the prolonged period of unemployment and large stack of bills that have piled up.

        1. This article specifically mentions lowering your tax rate so that you don’t end up paying more taxes when they take away the MID. Please don’t be against removing the MID until you’ve seen the whole proposal!

          1. That will never happen and the greedy SOBs of BOTH parties will make sure of it.

        2. is it really that hard to find another job? or is your pride hurting you too much?

          1. Yes, it IS that hard to find another job in my career field. Construction has been decimated with well-established companies either cutting down to the bone or going under themselves. I haven’t been sitting at home eating bon-bons and living off of the public dole. Like millions of others right now I’m finding it extremely difficult to find another job in my field, so much so that I’m working on moving on to another career. That’s what a lot of people are doing and I don’t see why you’re being a sanctimonious prick about it.

            1. There’s a new sewer going in on my street in San Francisco and quite a bit of equipment already staged. I walked over to three of the workers today to ask that they not block the sidewalk. The third one I approached spoke english. It’s possible the first two speak english but that wouldn’t explain the blank stare and lack of a response to my questions.

      3. If you’re renting it out, you get to deduct your full carrying costs as a schedule C business expense.

        How much time and money does the average person who itemizes have to spend on tax preparation?

        1. As a CPA I usually spend at least a half an hour with a client, most often, closer to an hour. And they probably need to spend a good amount of time keeping their records updated.

  4. Once you hit the AMT, those deductions are phased out anyhow.

  5. All this middle-class welfare is going away. Get used to it.

    1. Not to pick a nit, but getting to keep more of my own money is not welfare.

      1. but it is a subsidy of behavior from your fellow taxpayers that do not engage in such behavior

        1. I think few would mind getting rid of the interest deduction if we also got rid of govt rental payments for our own property. They usually come close to equal, although one is fed and one is state. This country was founded on private property, which has not existed for some time now.

    2. I thought welfare meant a transfer of wealth to the welfare recipient.

      I wasn’t aware that paying less money to the government was the equivalent of the government writing a check.

      So not taking equals giving?

      1. Liberal speak double-talk has infected our comments!

        1. Liberals frame the debate.

      2. So not taking equals giving?

        What annoys me is having my money taken, then having to prove it’s mine so the government graciously gives it back (maybe).

      3. It’s a little more debatable in the case of a special exemption. You weren’t given the money, sure, but you were given an exemption from paying what everyone has to, which has monetary value to you.

        Would you consider someone to be on the dole if they receive a check from the government which is less than the other taxes they pay to that government (e.g. FICA, sales tax, tariffs/excise, etc.) If so, why?

      4. “So not taking equals giving?”

        According to the political dictionary, yes.

        It’s the same if you look up “cut”. You’ll find the definition is; “An increase that isn’t as big as you want it to be.”
        Consider the following usage: “The Senator was dismayed at the thought of a personal pay cut.” or “Congress is determined to cut spending by the end of the year.”

    3. The MID isn’t middle class welfare. Social Security and Medicare are middle class welfare.

  6. But in recent years, the middle class has seen its share of the mortgage interest deduction (MID) steadily erode, undermining the political case for retaining the subsidy.

    A deduction is a subsidy?
    Not taking is the same as giving?
    Deducting from taxes is the same as the government writing a check?

    1. A deduction is a subsidy?
      Not taking is the same as giving?
      Deducting from taxes is the same as the government writing a check?

      In statist-land, yes.

      1. Since when did Reason start peddling in statist class-envy propaganda?

        1. Evidently August 5, 2011. It’s kind of sad, really. (Things were so much better when Virginia Postrel was the editor?)

    2. Letting some people deduct and not others based on arbitrary lifestyle choices may as well be a subsidy. Unless you’re going to allow equivalent deductions for everyone and not make anyone cover the difference (which would amount to a tax cut), then you’re collecting the determined amount of revenue more from some people than others. Those people who don’t make the tax-privileged lifestyle choices are effectively subsidizing the others. Not sure why that’s a tough concept for people to grasp.

      1. So if I steal twenty dollars from you, then steal fifteen from robc because I like his shirt, that is the equivalent of me giving him five dollars of your money?

        Because that is what a subsidy is. Me taking five dollars from you and giving it to him.

        Taking less equals giving?

        1. Yeah, if the tax rates are designed to bring in x amount of revenue and all else being equal, robc and I would have each paid $17.50, letting him pay only $15 and taking the balance from me amounts to me subsidizing him to the tune of $2.50.

          I don’t disagree that it’s all stealing, and on an individual level I am all for people keeping as much of their money as possible. It’s just that most of the mechanisms to do that come at other people’s expense (again, unless you’re going to just take in less revenue, i.e. lower taxes overall).

          1. Taking less equals giving. Got it.

            1. If taxes are designed to bring in X amount of revenue and someone else’s lifestyle choice allows them to pay less toward X, resulting in other people paying more than they otherwise would toward X, what label would be more accurate than “subsidy for that lifestyle choice” for that scenario?

              1. But taxes are not designed for revenue. They are designed so politicians have power. They are designed to please special interest groups. They are designed for social engineering. They are designed to increase someone’s power.

                Revenue is a side effect.

                1. I guess the “if” at the beginning of my question wasn’t enough to establish the hypothetical nature of the question so as to eliminate the avoidance of an answer based on politics.

            2. A single person with no kids who rents their dwelling pays more in tax than someone with their exact same income who has a layabout spouse, a couple of kids, and a mortgage. If we all paid as little tax as Mr. Kids & Mortgage, that would be awesome. But since we only allow certain people to pay that little in tax, the rest of us are paying for his tax break.

              1. A tax break is not a gift. Paying less is not the same as receiving.

                Sure, the end result is the same as if equal amounts were taken from both of you, then some of what was taken from you was given back to the other person as a subsidy. But that’s not what happened.
                You both paid different amounts, but you both paid.
                Nobody got a subsidy.

                1. So if someone’s parent made a direct payment to a college for 80% of the tuition due and the child made a direct payment of the other 20%, they both paid different amounts but nobody got a subsidy? Whereas if the parent cut a check directly to the student, someone did get a subsidy?

                2. A tax break is not a gift.

                  Call it what you will. In the end it is government favoritism unless everyone receives the same break. In the end tax deductions for arbitrary reasons are evil.

                  1. In the end it is government favoritism

                    Uh, yeah? Isn’t that what politicians do? They pick favorites in order to get votes?

                    Hello? McFly? You in there? Hello?

              2. Since tax revenues and expenditures have absolutely connection with one another in the federal budget, your argument doesn’t hold.

              3. Damn straight! Mr. Kids & Mortgage (and his “layabout” spouse) should have to pay their fair share! “Shared sacrifice” right?

                Bet Mr. K&M owns a jet too.

          2. The tax rates aren’t really designed to bring in X amount of revenue, though; otherwise, they could just specify a revenue target and prorate it per person based on their income relative to the sum of taxable income.

            1. Which be totally awesome to watch in action, so long as I already had my post-apoc plan in place.

      2. A lifestyle choice is choosing a red shirt over a yellow one. A lifestyle choice is choosing daily orgies over monogamous marriage.

        Buying a house isn’t a lifestyle choice. Only the enfeebled would believe such foolery that buying a house, presumably versus renting, is a “lifestyle choice.”

        1. It’s a lifestyle choice because it depends largely upon what choices you made for your occupation, where you live and the choices you make in paying your bills as it pertains to your fico score.

          House ownership is actually a federal subsidy to the local government since the land would, theoretically, remain undeveloped and therefore have a lower valuation and associated property tax burden. Does anyone believe an apartment building with “n” units pays a property tax equal to “n” houses? Of course the local government often erects legal hurdles for housing that will favor one style over another but that’s another discussion.

      3. Non deed holders don’t directly pay prop tax either. Nither do most renters in this market. Alot of renters are now “subsidized” by the owner In the underwater market.

    3. We wouldn’t have a deficit if we weren’t subsidizing the other 65% of you ingrates’ incomes!

  7. Another option would be to return to the original 1913 rule and make ALL interest deductible. Im sure the credit card companies wont oppose that.

    1. But that would eliminate incentive for certain special interests to contribute money to politicians who craft legislation in their favor.

      Think of all the lobbying jobs that would be lost!

      Why do you want to destroy jobs?

    2. Ya, Interest is Anti-Income. All of it should be deductible.

      1. The orginal rationalization was that the recepient would be paying the tax on the interest.

        1. Corporations pay taxes on their profits which are taxed again as income for shareholders.
          The trick is to figure out how many times you can tax the same dollar.
          Do that and you’re guaranteed a committee chair!

        2. That only makes sense if the recipient was an Individual. In a simplified environment, there would be no Corporate taxation, so there wouldn’t be direct double-taxation of interest.

        3. The orginal rationalization was that the recepient would be paying the tax on the interest.

          The original rationalization was that households and business should operate under the same accounting rules.

          1. Can I deduct my living expenses and just pay tax on my “profit”?

      2. Reagan got rid of credit card and auto loan interest deductions.

    3. Woo woo!!! Subsidize the banks some more!!! Woo woo!!!

  8. People with higher incomes purchase more expensive homes, and as a result have more mortgage interest to deduct than people with lower incomes?

    Like, OMG!

    1. People with high incomes also pay the AMT which phases out those deductions.

  9. “In a new study I co-authored with economist Dean Stansel, we calculated that if an MID repeal were combined with a proportional reduction in tax rates to make it revenue neutral, average rates could be reduced by 8 percent for everyone.”

    This would be great except for the fact the government will just turn around and raise the rate again, they’ll be more than happy to scrap the deduction though. It’s like the VAT tax argument. People argue for it to replace income tax, but when it’s all said and done if we allow VAT we’ll end up with both taxes. I think the only real solution is to have no taxes at all, then you don’t have worry about who benefits most from a deduction.

  10. “Meanwhile, low-income families, seniors, and Americans without mortgages gain virtually nothing from the program.”

    Wow. So people who don’t have a mortgage don’t get to take advantage of the MID program. Kinda like saying that people who don’t own or drive a car have to be concerned about the high cost of gasoline. Go figure.

    1. Who says they don’t have a mortgage? They may just not pay enough interest to make itemizing worth it and instead take the standard deduction.

      1. If they have a mortgage (or had one and paid it off) they have property tax, which also goes on schedule A. I’ve seen a lot of returns volunteering with AARP Tax-Aide, and home ownership is usually the indication that itemizing will be worth while – or at least worth looking at.

        1. With the condo I used to own, I was very close to not getting to itemize. I usually have enough “other” stuff that itemizing pays off.

      2. The amount of interest paid on a mortgage isn’t the determining factor to decide whether to itemize (1040), partially itemize (1040A) or not (1040EZ).

        http://www.irs.gov/taxtopics/tc352.html

        Primarily, law requires itemizing if income exceeds $100,000 or if you’re self-employed.

  11. Reason and Cato have been all over this message lately, but you keep ignoring the fact that RENTERS BENEFIT FROM THE MORTGAGE DEDUCTION!!!

    Why? Because their wealthy landlords take a big deduction off the rental properties, making them cheaper to own and manage, and therefore lowering rents.

    This is business 101, people. Lowering the cost of doing business lowers costs to consumers.

    Repealing the deduction is a tax hike for everybody except those who have already paid off their mortgages, and isn’t Reason always pointing out that seniors are America’s wealthy demographic whenever we’re discussing Medicare?

    1. Ummmm…..wow, I dont even know where to start.

    2. (Note: Eliminating the deduction while lowering rates still might be a good idea. I’m just pointing our a gaping hole in your analysis.)

      1. The gaping hole is wrong.

        Eliminating the Individual Mortgage Interest Deduction would have no effect on business deductions of interest.

    3. Oh poor-minded Tara, you couldn’t be more wrong when you claim:

      wealthy landlords take a big deduction off the rental properties, making them cheaper to own and manage, and therefore lowering rents. This is business 101, people. Lowering the cost of doing business lowers costs to consumers.

      Prices having nothing to do with costs, Tara.

      There is one, true, great, invariant law for the whole of economics — the Law of Prices. The Law of Prices holds that the winning bids of demand in the face of supply set the price.

      Renters pay what they pay for rent because they are the winning bidders for that particular property.

      Whether landlords earns a fat profit, a skinny one or merely breaks even has to do with the prices they paid for their capital (intermediary products that yield goods), in this case their improved land and the maintenance of such.

      For anyone can imagine a landlord in the upper East Side of Manhattan who has acquired her apartment building through inheritance, yet who fetches rents as high as someone who has paid millions for the building next door.

      Why is this? The winning bidders who want to live on the Upper East Side bid prices to nearly the same for apartments in each building regardless of the cost of production structure to the material capitalists (direct speculators).

      1. Still, when you have a housing glut, you probably also have a glut of rentable properties, so there’s no reason why the prices shouldn’t experience a lot of downward pressure.

      2. In the face of market competition, lower costs allow you to reduce your price while still maintIning some profit. So yes costs and prices do effect each other. No MID no lower price (across the whole market for mortgages in the same maturity). Therefore renters get cost passed down. Therefore higher price.

  12. A family of 4 with 50.000 income,after deductions,credits and personal exemptions has a very low tax rate.

    1. I would hope so. A family of 4 with a $50,000 income is a pair of Wal-Mart greeters with two kids.

      50K is the median *individual* income, is it not?

      1. Nope.

        $49,777 was median HOUSEHOLD income in the US in 2009. It had been above 50k for the few years before that.

        1. $49,777 was median HOUSEHOLD income in the US in 2009. It had been above 50k for the few years before that.

          You also need to adjust for regional differences. $50K in San Francisco is NOT $50K in Alabama.

      2. http://tinyurl.com/3rvmjey

        Here’s a link on the subject you might want to check out.

        1. Tara seems to get a lot of facts wrong.

  13. Anyone who supports the mortgage interest deduction should have, “WHY ARE YOU AGAINST AFFORDABLE HOUSING?” yelled at them on a regular basis.

    1. The mortgage interest deduction probably increases the price of housing.

      1. Yes. Yes it does. I’ll assume you just read my comment wrong.

  14. 50K is the median *individual* income, is it not?

    More like 30.

  15. I don’t see how making these types of arguments for getting rid of deductions or subsidies is at all statist. From a moral perspective, why should the government be able to encourage or discourage any behavior through the tax code?
    I feel like the author’s main point is that meddling with how we tax people necessarily influences the market, and what follows is all the unintended consequences that our politicians like to create. If the argument against it is that simply taking taxes to begin with is immoral, then I don’t think nit-picking at how the code is written is really the vehicle to advance your cause, but repealing the entire income tax would be.

    1. Ya, but in the mean time we should do all our nitpicking in the right direction.

      Getting rid of Mortgage Deduction = tax increase = wrong direction.

      Letting everybody write off all their interest = tax cut = right direction.

      1. Ahh, cause really what we should be doing is encouraging consumers to get MORE in debt.

        Got it.

        1. I was thinking the same thing.

  16. Guys, the point of this story is that the purpose of the home mortgage interest deduction was to increase home ownership. It hasn’t.

    Besides that, the government should not be picking who it likes and dislikes via the tax code. There is no difference between the government giving tax breaks to homeowners and giving tax breaks to buyers of electric cars, or producers of ethanol.

    Taxes should be lowered for all taxpayers not just for a select few who do what the government wants.

    1. the point of this story is that the purpose of the home mortgage interest deduction was to increase home ownership

      If that’s the point of the story, its entire premise is wrong and the story should be thrown in the garbage.

  17. Yes, like NAL I think you guys are getting too agitated about the “Snark bark growl that’s raising taxes if you get rid of this deduction!” element here and not focusing on the main point of the article: that the amount of the deduction actually received by middle-class people is too meagre to make this a “middle-class homeownership” program.

    That’s all the article is trying to say.

    It’s trying to compare the program’s outcomes to its stated purpose.

    1. One point that seems to be missing here is a big reason middle class use of this deduction by home-owners is so small is that the standard deduction has gotten so big. I bought my first house for 80K and was able to get a pretty good write off for a couple of years. The Bush tax cuts raised the standard deduction enough that I lost money by itemizing. This last year has been the first time I’ve used the deduction in 10 years, and it’s only because I had two house payments. Unable to sell my last home, I’ve become a landlord.

  18. Should be interesting to see how that all turns out.

    http://www.anon-web.us.tc

  19. But wouldn’t eliminating the mortgage interest deduction amount to tax hike? In fact, the impact would be limited, since 75 percent of Americans don’t even claim the deduction each year, meaning the vast majority of people will find their tax bills unchanged.

    In a new study I co-authored with economist Dean Stansel, we calculated that if an MID repeal were combined with a proportional reduction in tax rates to make it revenue neutral, average rates could be reduced by 8 percent for everyone. The majority who don’t use the mortgage interest deduction would see a tax cut and the few that do would not see too dramatic an increase in taxes.

    *****

    That’s some weasel language if I’ve ever heard it. If you want to “soak the rich,” just come out and fucking own it.

    1. Reverting back to Clinton-era tax rates is not too dramatic an increase in taxes.

      1. Reverting back to Clinton-era tax rates is not too dramatic an increase in taxes.

        Reverting back to Clinton-era spending is a dramatic reduction in spending. If you do this one, then you don’t have to do that one.

        1. Where can I sign up.

          I’m serious.

    2. That’s some weasel language if I’ve ever heard it. If you want to “soak the rich,” just come out and fucking own it.

      So Rich Guy A and Rich Guy B would both have their taxes reduced by 8% or so, and Rich Guy B would no longer get a subsidy for his house debt. Rich Guy A is a responsible person who owns his house outright so he is not currently receiving this subsidy. And this is “soaking the rich?”

  20. now you want to take the one benefit I get from not defaulting on my mortgage?

    Next time, buy a house you can afford.

    1. Property tax property tax property tax. Why is it that MID is some sort of gift from our noble leaders but prop tax is our duty as humble servants of the state?

  21. make ALL interest deductible

    Because what this country desperately lacks is an incentive to borrow.

    1. All or none. Picking which interest should be deductible is wrong.

      1. Agree. Also don’t understand why business gets to use different accounting rules than households.

        1. I dont understand why households get to use different accounting rules than businesses.

  22. There is no mortgage interest deduction in Canada, so Canadians tend to pay off their mortgages as fast as possible, as would Americans were it not for the tax distortion.

  23. To the cosmotarians, a tax break is a government “subsidy.” To the libertarian, taxation is theft. If Charles Koch doesn’t want you to buy a house, then, dammit, why should you be allowed to?

    1. You’re just supposed to drink the Kool-Aid, Justin, not jump in and paddle around in it.

  24. Meanwhile, low-income families, seniors, and Americans without mortgages gain virtually nothing from the program.

    This is completely NOT TRUE.

    Rents would GO UP if the MID went away.

    1. No they wouldn’t. For a landlord, the loan is for income-producing property. The interest is and always has been a deductible business expense. Also, the property itself is depreciated in the landlords accounting.

      No reason why you can’t sell your house to a “business” that becomes your “landlord” – and said landlord can deduct the loan interest as a business expense. And said landlord can also depreciate the property.

      1. This is what I was thinking, if the MID goes away, just set up an LLC (or whatever form works best) to own it and rent to yourself and it can deduct the interest.

        1. That’s already prohibited by law. One cannot rent to oneself and claim operating expense deduction.

    2. Or down.

      I see two factors, each driving rental prices in a different direction. Not sure which would dominate.

      Neither would be significant.

    3. Rents would GO UP if the MID went away. ~ Strawman

      There is one, true, great, invariant law for the whole of economics — the Law of Prices. The Law of Prices holds that the winning bids of demand in the face of supply set the price.

      Renters pay what they pay for rent because they are the winning bidders for those particular rentals.

      Whether landlords earn fat profits, skinny profits or merely break even has to do with the prices they paid for their capital (intermediary products that yield goods), in this case their improved land and the maintenance of such.

      For anyone can imagine a landlord in the upper East Side of Manhattan who has acquired her apartment building through inheritance, yet who fetches rents as high as someone who has paid millions for the building next door.

      Why is this? The winning bidders who want to live on the Upper East Side bid prices to nearly the same for apartments in each building regardless of the cost of production structure to the material capitalists (direct speculators).

      Only if you believe elimination of the MID would curtail supply in the face of growing demand, would prices rise.

  25. 1)Regardless of the wisdom of the original decision to use the tax code as a social engineering device, once a so-called loophole has been created, closing it amounts to a tax increase for those people using it.

    2)It is simply staggering to read in Reason that a tax increase is okay if it’s for “only” 25 percent of the U.S. population. Would Reason think raising the general income-tax rate was okay if it affected “only” the top 25 percent of earners?

    3)This piece is unbelievably callous about the people who would be affected. These people committed themselves to hundreds of thousands of debt on the basis of calculations including the mortgage deduction. Most of them are not Bill Gates. It will play havoc with their lives.

    4)There is nothing evil about people getting to keep their own money rather than give it to the government. Tax breaks or loopholes or whatever you want to call them are bad only insofar as they distort the market. If you want to reduce the distortion, cut taxes. I cannot imagine a libertarian arguing that the solution to the unfairness of marijuana laws is to bring back Prohibition for alcohol, too. But that would be exactly the same thing.

    1. These people committed themselves to hundreds of thousands of debt on the basis of calculations including the mortgage deduction.

      Making a 6 figure, 30 year decision based on a government policy that could easy change on a whim is fucking stupid.

      See also, depending on social security.

      1. That is why few people actually make a house purchase decision based on the MID. therefore, it really isn’t subsidizing anything (other than the “subsidization” of further political hand-wringing).

      2. So because the govt can instute a tax at any time effecting any decesion we should stop living?

    2. once a so-called loophole has been created, closing it amounts to a tax increase for those people using it.

      You sound like my parents (and in the bad way, not the good way). They are generally sensible, but they dont understand the concept that you design from scratch.

      If we rebuild the tax code, HOWEVER, unless we dramatically cut taxes (which I favor) there are going to be winners and losers.

      If it was the “right” way to do it from the beginning [sprinkle SLD liberally thoughout this comment], it is the right way to do it now, regardless of the details of the change.

    3. Gain reading comprehension skills, Yossarian.

      While Anthony Randazzo suffers from weak expression skills (read: his writing sucks), he stated that eliminating the MID ought to be offset by lowering marginal tax rates across the board by 8%.

      In this way, eliminating the MID

      [t]he majority who don’t use the mortgage interest deduction would see a tax cut and the few that do would not seean increase in taxes.

  26. The average tax savings for households with income between $40,000 and $75,000 is just $152 a year. That’s $12.66 a month
    =============
    Flawed argument and misleading to boot.

    People don’t buy homes because of the mortgage interest deduction in years 20 – 30 of a thirty year mortgage.

    So I suggest the author go back to the drawing board and tell us what the monthly and annual mortgage interest deduction is in the first five years of a mortgage.

    Break it out by age group and income group.

    My guess is the annual mortgage rate deduction for the middle class home owners within the first five years of their initial home purchase is a lot higher than what the author leads us to believe.

    Having said that I agree that the mortgage interest deduction should be removed because like all centralized economic planning it distorts what the free market activity would be in this case in the buying and selling of homes

    1. Your counter is flawed. Buying decisions should weigh the entire period, not just first 5 years.

      1. And your counter is flawed. How many people actually own for the whole 30 year period?

        1. Not looking it up and no idea if it is accurate, but when I did my refi last year, the mortgage loan guy said the average life span of their 30 year mortgages was about 5 years

  27. Eliminate all deductions except those which 1) contribute to productivity: health care, education and savings for investment, and 2) that which eliminates taxes on non-disposable income.

  28. My personal tax change I would like to see:

    Eliminate corporate income tax and make C-corps pass thru entities.

    And for good measure:

    Hail Eris!

  29. Don’t forget the other benefits of home ownership: property taxes, maintenance, liability.

  30. Many Americans believe the mortgage interest deduction allows them to deduct their entire interest payments from their tax bills…

    And real estate agents are more than willing to perpetuate the misunderstanding. As the standard deduction has risen and home prices and interest rates have fallen, fewer people can even claim the deduction, and the amount they gain over the standard deduction is not nearly as large as they imagined when calculating their net after-tax payments.

    Also unstated in the article is the geographic distribution of this deduction — taxpayers in states like California, New York, and Massachusetts with higher average home prices are getting a bigger deduction.

    Even so, removing a deduction is in fact a tax increase, at least for those affected. I wonder if the SuperCongress will remove the deduction for everyone, or allow those who already have mortgages to continue to claim it….

  31. The liberal bias of this article is apparent at many turns and the referenced data in inconclusive, at best. For example, what possible relevance is the change in home ownership rates from 1994? What would the absolute rate of home ownership have been without the MID? Personally, as I have moved up the income bracket and bought and sold homes, the cash flow benefit of MID was a relevant part of my decision making process. And so now, I sit with a home that is 30% below the highwater mark with taxes 5x higher than when I bought and zero prospect for real estate tax relief. Repeal of the MID will have a ripple effect across the housing market, just as rising real estate taxes are having, when it comes time to sell. It is simple math. The capitalized value is inversley proportional to the fixed cost of ownerwhip. I say hands off the MID for primary residences. Second homes, I have no problem. Or, put a cap on total mortgage debt per household and let individuals decide how they might want to use it.

  32. Yes, getting rid of the MTD, and all the other deductions would be good (with a coresponding lowering of the tax rate of course)

    even better would be implementing the Fair Tax, and getting the government out of every detail of your financial life.

  33. to me the primary point is that people made longterm investments WITH the mortgage interest deduction in mind.

    god knows i did. i would not have bought the house i bought if it didn’t exist.

    i don’t know if i count as “middle class”, my income is about 100k per year, but i strongly depend on it.

    more importantly, i made important LONGTERM decisions with that in mind.

    if they want to get rid of it, it should only apply to new mortgages, not already in place ones.

    of course that may be wishful thinking 🙂

  34. Holy crap reason. Don’t you fear your corporate masters who demand special treatment from the government?

    1. You’re a socialist just like your boy—–Obama.

      1. Hey idiot–look up the definition of socialism in Websters. Obama does not advocate the government controlling the production and distribution of all goods in the USA.

  35. That is an excellent single by the Middle Class. The first time I ever heard it, I momentarily though they were saying “Idaho” instead of “Out of Vogue.” It’s a-mighty quick-like.

  36. In the first paragraph, you call a tax deduction a “subsidy.”

    Either you fail to understand the meaning of the verb, “to subsidize” or you are a closetted Marxist.

    Why post at Reason? Go to HuffPo, Mr. Randazzo. They like illiterates and Marxists, both. You’ll fit right in.

    1. When everyone else has to pay more in taxes to subsidize your special treatment, then it’s a subsidy.

      Or do you think if you hide the subsidy by calling it a tax credit it’s really ok?

      I guess we could give full tax credits to everyone that buys a porche, would that not be a subsidy?

      1. In the absence of property taxes you may have a point.

  37. Government tax policy helps the rich more than the poor. News at 11.

  38. A lot of the comments taking the author to task reflect a basic lack of understanding of how the mortgage interest deduction works, particularly the way the standard deduction and itemizing deductions interact.

    The reality for most taxpayers is that itemizing deductions yields only a modest improvement in tax deductions over the standard deduction.

  39. Paid off my house this year. During the time I was paying for it, thre was never a year when taking the mortgage interest deduction would have saved me money over the standard deduction.

  40. So true. Bought my house in 1979 and the first couple of years I could deduct. But then, it was better to take the standard deduction which was higher. Today, with the houseprices being so high it may be different.
    We need house prices more relative to personal income and that is what is wrong with this country!

  41. ‘Families where the head of household is between 25 and 35 years-old with incomes over $250,000 have, on average, a $7,711 deduction from mortgage interest, compared to a similar household with earnings between $40,000 and $75,000 a year, and taking an average $571 deduction.’

    Over 250k wage earners can’t write off home interest in access of 1.1 million and are exposed to a steep itemized deductions phase-out schedule (of which home mtg int is a large component) in addition to AMT as the case may be. Just saying.

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  43. This article twists the facts. I want my mortgage interest deduction. Screw you Libertarians

  44. And what a happy “accident of the tax code” this mortgage interest deduction has turned out to be.
    I regard your entire article as one steeped in the economic clap-trap which purist Libertarians too often resort to in their ivory tower attempts to explain what motivates people to do what they do. Affordable, and decent housing was virtually unaffordable for a vast number of purchasers considered to be highly “credit worthy” for many years. Due to high interest rates and the sky-rocketing costs of land purchase and home-building in many parts of the country, even qualified buyers couldn’t afford the cost of a re-sale home, let alone a New home!
    That these home-buyers accepted the responsibilities of home ownership and took the risk of investing in realty that is constantly being either devalued or over-inflated with every stroke of some actuarial’s pen,and that these home buyers suffer disproportionate taxation throughout many cities in America for what should be the shared costs of such things as education; I see the MID as only an equitable recompense for the increased property taxes we pay. Additionally, it occurs to me that all homeowners should thank Presidents such as Ronald Reagan, who unlike Libertarians, wasn’t blind to the inequities, and knew that there was more to home ownership than purely an economic undertaking.
    Your assumption that those not using the mortgage insurance deduction will see a tax gain flies in the face of reason by neglecting to consider that the words “revenue neutral” do not exist in the lexicon of our “tax and spend” Federal government. May I suggest that you get your collective heads out of the clouds, paradigms and ideals which apparently occupy your imaginations to begin addressing real-life scenarios?

  45. The MID actually does encourage purchasing a home – but it discourages paying off the debt.

    It finances leverage. Do you think maybe that wasn’t the best idea?

  46. The desire for more federal income without taxing the rich is the basis for these type of articles.
    Use inflation adjusted numbers and it looks like more middle class people have taken advantage. In 18 years we had a true inflation rate of 4% a year then salaries to stay even would have to double. During that 18 years the amount of women working pushed more people into higher brackets.

    To raise a family with a wife and 2 kids – house payments and car payments – some day care – and taxes – $100K (before taxes) is close to the minimum now days in CA. In the rural areas less is required and income of less (and less middle class people).

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