The Upper-Class Entitlement

It's time to end the mortgage interest deduction.


The federal income tax code is full of complicated deductions, credits, and loopholes, which together exempted $1.2 trillion from taxation in 2009. The single largest benefit, amounting to around 35 percent of the total, is the mortgage interest deduction. This longstanding incentive, which allows individual taxpayers to deduct up to $1.1 million in home loan–related interest payments from their taxable income, has warped the real estate market and overwhelmingly benefited higher-income Americans, all while failing to achieve its stated policy objection of promoting homeownership. As Congress continues to debate federal budgetary and tax policy in an atmosphere of debt ceilings and ratings downgrades, the time has come for the mortgage interest deduction to go.

All taxes on income create distortions in economic decision-making. The more something is taxed, increasing its relative cost, the more individuals will substitute a good that is comparatively cheaper. This is as true of taxes on income produced by labor and capital as it is of taxes on goods and services. Such market distortions reduce efficiency, creating what economists call excess burden or deadweight loss. 

The least distortionary income tax system is one with the broadest possible base and the lowest possible marginal tax rates. If that $1.2 trillion in itemized deductions was instead spread throughout the tax base, the average tax rate could be reduced by roughly a fifth, from 17.8 percent of taxable income to 14.5 percent. Such a tax cut would directly increase the reward for productive, income-generating activity. Closing loopholes such as the mortgage interest deduction while lowering overall rates would lead to a more productive economy.

100 Years of Deduction

Some form of the mortgage interest deduction, or MID, has been in existence for as long as the income tax itself. On the very first federal tax form in 1913, a taxpayer was allowed to deduct "all interest paid within the year on personal indebtedness of taxpayer." Back then, very few people actually paid income taxes: The income bracket levels were set very high and rates very low, so only the very rich had to contribute. As a result, the distortions in individual decision-making created by the interest deduction were relatively small.

During World War II, tax rates were hiked substantially to raise revenue for the war effort, while exemptions and tax brackets were significantly reduced. The broadening of the income tax to more than just the highest-income individuals, combined with an increase in homeownership rates, greatly expanded the impact of the mortgage interest deduction.

In 1986, the Reagan administration embarked on an ambitious plan to eliminate loopholes from the tax code in order to reduce marginal rates. The resulting tax reform deal eliminated interest deductions on credit card balances, car loans, and most other kinds of loans. But the mortgage deduction remained.

The main policy reason cited to justify the tax break for mortgages is the belief that it helps increase the homeownership rate, which in turn promotes social stability, responsibility, and wealth creation. Homeowners tend to treat their property better than renters do (just as car owners treat their own cars better than cars they rent), therefore increasing the value of that property and the property of their neighbors.

But the historical record shows that the mortgage interest deduction is a fairly ineffective tool for increasing homeownership. The percentage of U.S. households occupied by owners remained between 62 and 66 percent from 1960 to 1997, peaked as high as 69 percent during the housing bubble, and currently sits at around 66 percent. That's virtually the same rate as many Western countries, including Canada, that have no mortgage interest benefit. (There are only a handful of international examples of anything like this tax break.)

If the deduction had a significantly stimulative effect on homeownership, we would expect to see a fast and continuous increase in the ownership rate as the dollar amount of the deduction continued to rise. But that has not been the case. For example, the dollar amount effectively doubled between 1995 and 2008, with little noticeable effect on how many Americans owned their homes. The primary impact of the deduction is to increase the amount spent on housing by consumers who would choose to own anyway, thereby subsidizing housing-spending rather than homeownership.

One possible reason the deduction isn't converting consumers from renters into owners is that the promise of homeownership as an investment vehicle is routinely overstated. A 2011 study by the economists Eli Beracha of East Carolina University and Ken H. Johnson of Florida International University concluded that if individuals had the same amount of money to spend on housing and investment between 1978 and 2009, a majority of renters would come out ahead over the 30-year period. That's because rent tends to be cheaper and more flexible than mortgages, and people could use their excess income to invest in the capital markets, which tend to outperform housing prices over the long haul. 

Encouraging existing homeowners to go further into housing debt creates numerous distortions to the allocation of capital, since housing consumers have been using credit rather than their own assets to finance home purchases. This was a direct contributor to the housing bubble and subsequent collapse, which has driven rates of homeowner equity steadily downward, to below 50 percent. So not only did the deduction help create a damaging bubble, it did so while contributing to the reduction of overall ownership.

Who Benefits?

If you eliminated the mortgage interest deduction but kept the move revenue-neutral by lowering marginal tax rates, a sizeable majority of taxpayers would benefit. So who would stand to lose?

In 2009, only 22.1 percent of federal income tax returns contained the mortgage interest deduction. (The figure has remained between 21 and 26 percent since 1991.) Data from the congressional Joint Committee on Taxation (JCT) shows that only a small portion of taxpayers with incomes below $50,000 claim the deduction. In contrast, two-thirds of those with incomes above $100,000 do so (see Figure 1). 

The reason for this disparity is twofold. First, homeownership rates are much lower in lower-income groups. Second, lower-income homeowners are far less likely to itemize because the sum of those deductions would frequently be lower than the standard deduction. Even when they do itemize, the incremental benefit over and above the standard deduction is often quite small and not worth the effort. Furthermore, higher income taxpayers stand to benefit more because they have larger mortgages and face higher marginal tax rates.

How big is the benefit? According to the JCT, after you adjust for the difference between the standard deduction and the mortgage deduction, for a taxpayer with average income, the mortgage interest deduction is about $10,000 but only reduces taxable income by $7,600. At the 2009 average tax rate of 12 percent on adjusted gross income, that amounts to a tax savings of $912, or $76 a month.

But these numbers provide an incomplete picture, since the tax savings can vary substantially based on income level, age, and location. Using the most recent data from the JCT and the Internal Revenue Service, we found that taxpayers with incomes below $75,000 save less than $200 per year, while those with incomes above $200,000 save about $1,800 (see Figure 2). As a percentage of their overall tax bill, however, the lower-income groups save more.

Proponents of keeping the mortgage interest deduction often claim that repealing it would cause housing prices and therefore homeownership rates to fall. Lawrence Yun, chief economist for the National Association of Realtors, has repeatedly warned that getting rid of the deduction could reduce housing prices by 15 percent. "Whatever deficit reduction might be realized by taking a carving knife to the [deduction] would come at an intolerably steep price: trillions of dollars in wealth destruction and a new uncertainty in what has long been recognized as a bedrock of our economy," Yun wrote last year.

Even assuming Yun's estimate is correct—and there are a number of studies suggesting the deduction has a much lower impact on home values—there is scant evidence that higher housing prices are a good thing in themselves. Typically we associate a decrease in price (and increase in quality) with innovative growth, not with problems that the federal government need to solve. Housing price appreciation is only "good" from the perspective of owners using their property as investment assets. Surely those who are currently priced out of the housing market wouldn't consider a 15 percent decrease "intolerably steep." And the removal of artificial government barriers to housing depreciation would be the best way for the market to find bottom, begin clearing backlogged inventory, and start the road to real recovery on a stronger financial footing.

Mend It or End It?

The mortgage interest deduction has come under in­creased scrutiny over the past two years as part of deficit-reduction talks in Washington. So what would reform look like? There are three main possibilities: tweaking the deduction to better meet its stated policy goals, repealing it outright, or coupling its elimination with adjustments in the tax code to make the move revenue neutral. Before choosing one of these three, policymakers should consider whether promoting homeownership is even an appropriate role for government. We would argue that it is not, as borne out by the last two decades of ownership-goosing policies that contributed to the inflation and then collapse of the housing bubble.

Most proposed changes to the deduction thus far have sought to balance out its inherent favoritism toward wealthy homeowners. The December 2010 report by the presidentially appointed National Commission on Fiscal Responsibility and Reform (known as Simpson-Bowles, after co-chairs Alan Simpson and Erskine Bowles) proposed scrapping the deduction for a tax credit that would be capped at 12 percent of paid interest while lowering the maximum amount of the loan this could be applied to from $1.1 million to $500,000. Other proposals have suggested lowering the maximum mortgage interest available for deduction rather than creating a tax credit.

These changes would promote homeownership more effectively by targeting the subsidy at those who are on the margin between renting and owning, rather than simply encouraging higher spending on housing by those who are already homeowners. But like other recent tax policy attempts to jump-start the housing market, it is likely that such changes would have unintended consequences and end up becoming different means of creating similar distortions in economic decision making.

The better, though more politically challenging, option is to completely eliminate the mortgage interest deduction from the tax code. This would mostly affect young wealthy homeowners, with little negative impact on most other households. Low-income families would likely benefit, since any subsequent decline in home values would make housing more affordable. The housing market, which as of this writing has a three- to four-year supply of homes available, would be able to clear some of its inventory, possibly boosting homeownership rates in the near term.

But eliminating the mortgage deduction without any other adjustments would increase taxes for the one-fourth of taxpayers who use it to reduce their taxable income. Had the deduction been fully eliminated in 2008, households earning between $100,000 and $200,000 a year would have seen a collective tax hike of $10.2 billion that year. Households making less than $100,000 would have paid $4.2 billion more in taxes. It is true that the deduction distorts the economy, but a sharp increase in tax liabilities would also have negative economic consequences.

Policymakers who are more concerned with the benefits of reducing the debt than the impact of a tax increase may find the elimination-only route the most enticing. According to a report by the Joint Committee on Taxation, ending the deduction without any other income tax adjustment could cut as much as $94 billion from the fiscal year 2011 federal budget deficit, or around 6 percent. The question for policymakers is whether this deficit-cutting cash is worth a not-so-tacit increase in income taxes by more than 9 percent.

The most appropriate policy action would be a complete elimination of the mortgage interest deduction combined with reductions in marginal income tax rates to make the repeal revenue-neutral. Given that a full repeal would have broadened the tax base by $470.4 billion in 2008, we estimate that the 2008 average tax rate of 18.2 percent could have been lowered nearly 8 percent, to an average rate of 16.8 percent, without reducing the amount of revenue collected.

It is likely that a full and immediate repeal would face staunch opposition. And an overnight change may also be poor tax policy considering that some individuals depend on the mortgage interest deduction to afford their home. Therefore, we suggest phasing out the deductions for existing mortgages in much the same way deductions for credit-card and car-loan interest were phased out in the 1980s. Policymakers could end the deduction for new mortgages while targeting a specific tax year that it would go away for existing mortgage holders, and reduce the mortgage interest cap a certain percentage each year. This would soften the impact on existing mortgage holders.

Stop the Social Engineering

While the mortgage interest deduction is one of the most popular provisions of the federal income tax code, its actual impact is poorly understood. It is ineffective at promoting homeownership and has a negative impact on the housing market by distorting the allocation of capital in the economy. The deduction overwhelmingly benefits high-income households and comparatively wealthy young people with large mortgages who have not paid off much of their loans, particularly in wealthy, high-tax states such as California, New York, Massachusetts, and Connecticut. By contrast, low-income households that do not itemize and senior citizens with little mortgage debt get almost no direct benefit from the deduction.

Instead of promoting homeownership, the deduction promotes an increase in personal debt for young and high-income households. This contributed to the buildup of the housing bubble during the early 2000s, when more and more debt was used to finance homes. In the end, when the price bubble collapsed, individuals were left with very little equity in their homes, erasing all ownership gains of the last decade and putting the market back to levels seen in the 1990s.

If the elimination of the deduction leads to more financing by other means than excessive debt, we would likely see a much healthier housing market in the future. In a June paper for the National Tax Journal, the MIT economist James Poterba and the University of Pennsylvania economist Todd Sinai estimate that taxpayers could reduce their mortgage debt by 30 percent, or as much as 70 percent by liquidating all investments and assets, if the deduction were repealed. Any substantive mortgage-debt reduction like this would be beneficial to the economy, putting households on more stable financial footing and making them less vulnerable to sharp downturns in the market.

A repeal coupled with a matching tax rate reduction would reduce taxes for 75 percent of taxpayers while creating a more efficient tax system, one that produces fewer distortions in the market while encouraging economic growth. And as the housing collapse enters its fourth year, we need all the growth we can get.  

Dean Stansel (dstansel@fgcu.edu) is an economics professor at Florida Gulf Coast University. Anthony Randazzo (anthony.randazzo@reason.com) is director of economic research at the Reason Foundation.

NEXT: Steven Brill on How to Fix Public Schools

Editor's Note: We invite comments and request that they be civil and on-topic. We do not moderate or assume any responsibility for comments, which are owned by the readers who post them. Comments do not represent the views of Reason.com or Reason Foundation. We reserve the right to delete any comment for any reason at any time. Report abuses.

  1. Someone whisper that $1.1 million figure to the Occupy Wall Street gaggle and see how long it takes them to twitter new protest signs around.

    1. Including the big government Land enTitlement program that creates abstract lines upon the face of Mother Earth to restrict the free movement of her people from gathering and hunting.

      Or, if you want to keep such big-government enTitlement, at least quit bellyaching about big-government entitlements.

      It's contradictory to be "government for me but not for thee."

      1. Only White Indian wants to end all entitlements. To hell with his integrity, consistency,and non-contradictory logic.

        1. White Idiot is a facetious prick. I'll bet he's never killed and skinned and cooked anything over a from-scratch campfire.

          1. Then again, neither have I... but *I* don't go around the interwebz telling people they should be hunter/gatherers and live in caves.

  2. Eliminate it, keep it, tax it, whatever... I don't care, but quit messing with the tax code. This constant churning makes it very difficult one's personal life, let alone a business.

    The Feds in their infinite wisdom gave us the unsecured mortgage which led to the economic meltdown. Now they want to take away the mortgage deduction?

    Talk about adding insult to injury!

    1. "very difficult to plan ones's ....."

      Funny how that key word disappeared here too.

    2. "...unsecured mortgage which lead to the economic meltdown."

      neither the Fed nor Fannie are named defendents in the CUNA suit vs JP Morgan & the AIG suit vs BoA. both suits cite [MALFEASENCE] & [MISREPRESENTATIONS] to shareholders & investors. try actual info vs radio entertainment.

      1. Umm, how does the fact that Fannie and Freddie are not named defendants in a lawsuit prove your point in any way shape or form?

        1. He copied this from a comment he made earlier today on a different article.

        2. the lawsuits are a fact & need no proof

          1. So many things wrong with this statement; where to begin?

      2. Wait? Are you saying the government is ignoring it's own primary and predominant malfeasance and instead blaming someone else for the catastrophe it created?

        Say it ain't so!

  3. As long as tax rates come down, I'm perfectly happy to see this and other loopholes go away.

    1. Even more maleficent than deductions are tax credits. They are flat-out bribes. All tax credits should end immediately.

  4. Therefore, we suggest phasing out the deductions for existing mortgages in much the same way deductions for credit-card and car-loan interest were phased out in the 1980s. Policymakers could end the deduction for new mortgages while targeting a specific tax year that it would go away for existing mortgage holders, and reduce the mortgage interest cap a certain percentage each year. This would soften the impact on existing mortgage holders.

    The problem is more than an impact on existing mortgage holders. The current system is bid into housing prices up and down the scale. Elimination of the deduction would hit owners who do not hold a mortgage. The off-setting tax reductions could cushion that for fmailies, as the article says, but such tax changes would not avoid the hit to house values per se. This idea is attractive to economists but scary to asset owners.

    1. ^^THIS^^ There is no getting around the fact that houses are priced higher to account for the tax break. We are basically fucked.

      1. Since most of the benefit is in the first 10 years, you could do a 10 year phase out for all mortgages, new and old, and you'd be able to mitigate the damage.

      2. I'm not so sure. If the HID were eliminated, fewer people would buy initially, but they'd have to rent instead. That would mean rent prices go up, making renting more expensive than owning, which would increase the value of ownership I think it would balance out in the end.

        1. "...making renting more expensive than owning,..."
          It already is...the rentee makes a profit.

        2. "The primary impact if the deduction is to increase the amount spent on housing by consumers who would choose to own anyway,..."
          i spent six years in the real estate industry and never once had anyone ask me how much their mortgage interest deduction was or use that as a deciding factor in their purchase.
          CREDIT, on the other hand was often a deciding factor on how much people could borrow (look, you can afford a $2,500.00 payment per month).
          isn't the elephant in the room the increase in credit driving the market...
          also, we certainly aren't teaching the wonders of saving your money (i.e. paying yourself) and getting your money to work for you...
          net result, more renters, YEAH!

          1. Interesting. Because I just talked to a single woman in her 20's today (in sales, earning ~ $90k) who said she had to buy a house in order to get a tax deduction. Everyone knows that buying a house has tax benefits. Most people factor it in - whether or not they run their calculations past their Realtor...which they don't.

            1. most people realize there are tax benefits, yes of course! but as a deciding factor and MOST people factor it in? no, sorry.
              and any single person earning $90k would absolutely have found out when they had their taxes done they needed a deduction. which brings up one reason the deduction helps the market...but creating some kind of huge negative bubble on the market?

    2. What you say is true and confirms what the authors are saying about how this deduction has distorted the market. Undoubtedly, phasing this out would cause some pain. However, I rather see the government cause pain while ending a market distorting policy, than cause pain by introducing a market distorting policy.

    3. Elimination of the deduction would hit owners who do not hold a mortgage. The off-setting tax reductions could cushion that for fmailies, as the article says, but such tax changes would not avoid the hit to house values per se. This idea is attractive to economists but scary to asset owners.

      The resulting drop in property values would also kill the financial industry and crush local governments.

      1. Local governments could easily adapt tax rates to squeeze the same rents as before.

        The impacts on the finance sector is not obvious at all. But to the extent that it is feeding off the distortions, then all the more reason to eliminate them.

        1. Fucking right....government to the rescue!

          1. Government to the rescue...from the government!

    4. I agree that eliminating the interest deduction have a major negative impact on property values if it was done immediately, but a very long term phase out should minimize the disruption. I've thought that the deduction should be locked in at full value for all existing mortgages and then be reduced by 5% from that level each year for new mortgages originated that year, so if the change goes into effect in 2012, all 2011 and prior mortgages remain deductable at the full rate, all 2012 mortgages are deductible at 95% of the full rate, all 2013 mortgages are deductible at 90% of the full rate, etc. It would take roughly 50 years for the deduction to completely disappear from the system (30 year mortgage issued in the final year of the fade out deductible at 5% of full rate), but the impact on property values should be very limited since the fade out means that there should be a less than $1000 dollars difference in the deduction year-over-year.

      1. Create a simplified parallel version of the tax code--with no deductions but dramatically lower rates. Taxpayers could choose to operate under the new or old plan, but once you're in the new, you're in for good. Let the market drive the transition process.

        As to the solvency of banks based on reduced home values: banks are already insolvent now. If they are too leveraged to survive, then we have too many banks by definition.

        As to the effect on local governments due to dependency on property taxes: cut back services. Period. This action is long past due, anyway.

  5. Let's do this!

  6. The Internal Revenue Code originally was intended solely as a mechanism for funding the legitimate functions of the federal government. The problem is that Congress has learned how to use it as a societal engineering tool.

    It should not be a means to encourage or discourage taxpayers to engage in or refrain from supposedly socially desirable or undesirable behavior. Manipulating behavior by tax incentives or disincentives is a disingenuous way to get around the otherwise limited powers of the federal government. Can't outright ban something? Tax the shit out of it. Can't require someone to do something? Give them a big, fat, tax break.

    Get rid of all that bullshit and you could cut the size of the tax code by a factor of ten. And then lower the rates and still end up collecting the same amount of money.

    1. That, and it creates an artificial market.

      Get rid of all the bullshit, and you could fit the entire tax code on a single piece of paper.

    2. legitimate functions of the federal government

      Once you can whitewash aggression as

      1. Once you can whitewash aggression as "defense," there's no end to others engaging in your sort of deception.

        1. Anyone who is willing to call defense a whitewash of aggression is apt to do any other evil sophistry.

    3. The Internal Revenue Code originally was intended solely as a mechanism for funding the legitimate functions of the federal government.

      Original as in when?

      The sixteenth amendment was sold specifically as a basis for redistributing wealth away from the evil kkkorporashuns and millionaires. It never would have been enacted if people at the time were told that it would lead to wage withholding.

  7. If I made 50K in income but baid 49K in interest, I really only had a net income of 1K. So, all interest paid should be deductable. Distortion solved.

    1. paid. not baid.

      1. If you tell a lie often enough, people believe it is true. People love to talk about the tax deduction as an excuse to have and keep (and celebrate) debt. If people did the math, they might realize that the deduction isn't as lucrative as they think it is anyways.

        1. Not true,

          The deduction is very valuable because of inflation.

          1. Maybe I'm thinking of this backwards, but wouldn't inflation make the deduction of a fixed rate mortgage less valuable every year?

            1. Inflation incentivizes buying as much house as possible with the lowest possible principal payment which is the same direction that the MID incentivizes.

              1. Except, without the MID, you could still buy as much house as possible, it would just cost that much less than the MID makes it. The MID only increases what you are willing to pay for the same house.

        2. "If people did the math"

          You assume that the average American can do math beyond that needed to count his change.

          1. Er..., then, thinking about the typical person behind the register at the store, let's make that, 'can count beyond the number of fingers, toes and other pointy parts that he might have'.

    2. If I made 50K in income but baid 49K in interest, I really only had a net income of 1K.

      Erm, wut?

      You had $50K in income, and then chose to spend nearly all of it on paying interest on a loan. That does not mean you had only $1K in income.

      Are talking about "income" as defined in economic reality, or "taxable income" as defined by the tax code?

      1. No he's right and it's genius!

        I make $50k and I choose not to take out a loan for $1M.

        BAM! I'm a millionaire!

  8. Why not eliminate all deductions on Schedule A of Form 1040. Charitable deductions are a personal choice. For example, why should donations in support of a religion reduce one's obligation to a state? Why should income tax obligations to a state, such as New Mexico, reduce obligations to the Federal Government? They should not. One can always move to a state with no income taxes. Even medical expenses, as unfortunate as they are, also should not reduce one's tax obligations, especially those medical expenses that are a result of a choice of life style. All of these deductions are given in the name of fairness ? but what is fair? It is also not fair to increase the obligation of others because a personal choice or misfortune.

    1. Not a bad idea if you could bring the tax down to 5% or less. But what gives politicians more power than being able to manipulate the tax code?

      1. I agree. Eliminating deductions should be only a part of simplifying the current tax codes and a step toward introducing a flat tax.

    2. Yes, eliminate all deductions and have a flat 10% rate.

  9. Next you'll be saying the government shouldn't help people pay for their Chevy VOLTS.

    1. Or their solar panels.

      1. Or their gender studies degrees.

        1. Or privation property.

          1. you can keep your privation property if like that sort of thing...

  10. Upper Class Twit of the Year.

  11. I oppose any plan that gives more money to the miseryshits in office. Forget every other consideration here. All this does is give more money to narcissistic sociopathic power mad assholes. How is this a good idea?

    1. No, it removes a market distortion and would hopefully balance the tax burden in a simple way. Ideally, the miseryshits would get the same amount of money, it just would just remove a false market signal.

      1. This. Plus, QD, if you pair getting rid of the mortgage interest deduction with a decrease in the tax rates, then you may end up with a situation where both a market distoring policy is removed and the government gets the same or even less revenue.

        1. And if Twilight Sparkle the little unicorn comes to my town, she can solve all the other problems as well with MAGIC! Wheee!

          You people forget it's the same old same old miseryshits that have to pass this legislation. All this economic theory is nonsensical bullcrap until we can fix the people problem.

          1. QD: "I oppose any plan that gives more money to the miseryshits in office everything."

    2. Market distortion by said miseryshits = worse than taxes.

  12. The only thing the MID does is raise the price of housing.

  13. ending the mortgage interest deduction for individuals and keeping it for business will distort the market as well.

  14. This is a great idea. Of course they should get rid of most other deductions as well. Why do we subsidze people having kids again?

    Even better of course would be to go to the Fair Tax, and get the government out of every detail of your financial life.

    1. "why do we subsidize people having kids again?"
      so someone will be there to fluff your pillow and wipe your bottom in the nursing home, Knucklehead...

    2. Why do we subsidize people having kids? It's for the Children!

  15. I think we should pay taxes in this manner. Start with the full income tax you owe for the year, and add or subtract to it based on your subjective view of the services being provided. In other words, instead of a tax, we simply tip the government.

    1. I don't believe in tipping.

      1. Then you pay nothing!

      2. He convinced me, give me my dollar back.

  16. We also need to stop with increasing deductions based on the number of dependants. Do I really need to subsidize someone having more kids then they can afford?

    1. The elite hierarchy of the agricultural city-State needs a growing population for (1) soldiery - one of the first divisions of labor, and (2) a labor pool for their factories.

    2. Look at it this way:

      Having more children does require more income, ergo more work. With the progressive income tax, there's a built in penalty for this "lifestyle choice" to work more to support more children.

      The same is true of any other thing one might spend money on, of course. The difference is that people won't get quite literally up in arms about most other economic choices. The measly dependent deduction is a pathetic sop in the face of the real damage the progressive income tax does to family aspirations

      1. Emphasis on the progressive in the references to the income tax above.

  17. On the very first income tax form, ALL interest was considered deductible. I dont like the Mortgage interest exception, we should go back to making it all interest.

    1. The 6 deductions from the 1913 Form 1040:

      1. The amount of necessary expenses actually paid in carrying on business, but not including business expenses of partnerships, and not including personal, living, or family expenses

      2. All interest paid within the year on personal indebtedness of taxpayer

      3. All national, State, county, school, and municipal taxes paid within the year (not including those assessed against local benefits)

      4. Losses actually sustained during the year incurred in trade or arising from fires, storms, or shipwreck, and not compensated for by insurance or otherwise

      5. Debts due which have been actually ascertained to be worthless and which have been charged off within the year

      6. Amount representing a reasonable allowance for the exhaustion, wear, and tear of property arising out of its use or employment in the business, not to exceed, in the case of mines, 5 per cent of the gross value at the mine of the output for the year for which the computation is made, but no deduction shall be made for any amount of expense of restoring property or making good the exhaustion thereof, for which an allowance is or has been made

  18. Tell me again why the government should actively encourage debt financing.

    End deductibility of interest, for any purpose, for anybody, including businesses.

    End deductibility of anything.

    1. Its a business expense, business expenses should be deductible.

      End deductibility of anything.

      So businesses should be paying on Gross?

      On the individual side, I dont care either way. But it should be all interest or none.

      1. Can't we all get along on expenses?

      2. So businesses should be paying on Gross?

        It would greatly simplify things - no more arguing about whether a particular expense qualifies for a deduction or for depreciation or whatever. The only question would be what amounts must be included as "income".

        Of course, the complementing change to this approach would be to reduce the rate of the tax. If a company has $10 million gross income but after all the deductions, etc., has only $1.5 million in taxable income, and pays 35% tax, then tax it on the gross at 5.25% and you get the same amount of tax paid.

        Ultimately, isn't that really the issue? It's not really so much a battle over what the "right" rate of taxation is, or whether we get to deduct expenses or whatever, but how much tax we eventually end up paying.

        Under the current system, businesses pay billions of dollars every year to tax attorneys and accountants to figure all this nonsense out and make sure they squeeze every dollar out of every available substraction from the amount of tax that will be owed.

        Wouldn't it be nice if we didn't have to spend all that money on all that nonsense?

        1. The problem with gross is that some business are very high volume but low margin. Those companies would be killed on a gross tax.

          Better would be to just pay tax on GAAP income,

          Best would be the Fair Tax.


  19. Fee-for-service government is the way to go.

    1. It's the way to go for Statists.

  20. Ive said this before, and White Trolldian might even agree with it, but the only tax I can accept is a Single Land Tax.

  21. 1. Roll all federal taxes on income into one tax at a set rate.
    2. Eliminate all deductions, credits, etc.
    3. Charge everyone the same rate.
    (Everyone that wasn't high during math class will soon figure out that rich people will pay more money, even if paying the same rate as poor people.)
    4. Give the working poor incentive to stay working by giving everyone the first $30K of income tax free.

    Clean, simple, easy to understand and plan around. Also, simple to watch the slimey politicians cravenly trying to sneak in some pork.

    1. and still immoral.

    2. Here's what you're looking for, BRM:

      Tax and Entitlement Reform
      1. All persons residing in the U.S. shall come together in households for the purpose of reporting all income from any source, each item to be identified by payer's and payee's tax number, and for receipt of federal and state benefits. Members of a household need not be related, need not reside together, and a household may consist of as few as one person. The federal government shall collect no taxes other than provided in this act. (This taxes all persons equally, including those outside traditional families, and makes the total cost of government visible to all).
      2. Each year congress shall set by legislation a "minimum wage" and a "tax rate", which in turn will be applied to the previous year's reported incomes to determine the maximum expenditures of the federal government.. These basic parameters require annual review for tuning them to correct misassumptions and changing circumstances, and to counter economic fluctuations while providing a pay-down of the debt over an extended period of time.
      3. The following income shall not be subject to taxation:
      ? An amount equal to a year's earnings (2000 hours) at the minimum wage rate, for each adult (age 20-65) member of the household, decreasing 10% per year to 50% at age 15, and increasing 10% per year to 150% at age 70. (Family of two adults and two young children would receive exemptions of 100% + 100% + 50% + 50% = 300% minimum wage, or $46,500.00 at a minimum wage of $7.75) If that's the least someone should work for, why should it be taken from them?)
      ? All payments for what is classified as necessary health care for all members of the household including medical care, any pharmaceuticals prescribed by a recognized health care professional, vision and hearing aids, and membership fees for health-enhancing entities such as gyms or other exercise facilities. Health care insurance premiums may be deducted but not health care expense paid for by such insurance. (This provides health care assistance, both in paying insurance premiums and in paying that not covered. All costs are shared through tax deductions as an offset, but the individual now sees and shares the cost of each element of his health care, a serious deficiency in existing programs)
      ? All educational expenses including day care for young children or legally incompetent persons, that portion of state and local taxes identified as spent on education, that portion of parochial school tuition, fees and other expenses identified as going for non-sectarian education, tuition, fees and educational materials for private school education at any level. (This provides both a continuation of the public school system along with the freedom to pursue a better outcome for one's offspring through any of the alternatives.)
      ? All income saved into an identified account from which investments may be made. All withdrawals from this account for the benefit of any member of the household shall be reported as income to that member. (This allows providing for one's retirement and encourages investment as opposed to channeling the money through high overhead government systems. Since charitable contributions are not for the benefit of any member, they would be exempt from taxes, and no government agency is required to decide what is a charity; any group not returning anything of value to a member may receive funds tax free, including political campaigns).
      These deductions encourage growth of the tax base, thus growth of the government's ability to pay for its responsibilities, by fostering health care, education and investment, all of which contribute to growth of income, taxable to support legitimate government purposes, by reducing the cost of these services by an amount equal to their cost times the tax rate.
      4. The "tax rate" shall be applied to any income over and above the deductions listed above, regardless of amount. It seeks the elusive concept of fairness by taxing at the same rate all "discretionary" income.
      5. For households whose deductions exceed total income, the Federal Government shall make payment equal to the tax rate multiplied by the shortfall in income, as shall municipalities and states. This addresses aid to the truly needy, replacing the patchwork of entitlement programs.
      6. There shall be no federal tax on corporations or other business entities. This tax is paid for, and hidden from, those who pay it when purchasing of the products and services of corporations; it brings back profits of corporations now held overseas and makes American-made products more competitive on the world market.
      7. At the request, by legislation duly enacted by a municipality having greater than 100,000 inhabitants or a state, a surtax may be imposed on citizens of that municipality or state which shall be applied in a manner exactly as applied for the Federal tax. This assures sufficient revenues for all levels of government, collected on the same basis as federal taxation.

      1. Not really. Too many lifestyle choices of yours that will ultimately affect my rate. Also, if you let the idiots in congress set these rates, you will end up with a political circus over "the poor" or some other group used as a tool to gain power for the statists.

        The reason you use a flat rate and no deductions is to get transparency and to avoid the congress messing things up for their own advantage.

        No federal tax on any business making and selling products or services in the US using the labor of US citizens is a good idea. Frankly anyone that really cares about the poor, needs to oppose taxes on corporations as these really do nothing but make the cost of subsistence comodities higher and thus make it harder on the segment of the economy that has no wiggle room when buying these items.

        I have long been in favor of unlimited savings and investment accounts and would offer one addition. That we have A accounts and B accounts. The difference is that B accounts are for businesses like family farms that can exist as a unit of many items or as a collection of these items, all of which are themselves assets. If a farmer wants to pass the farm to his family and they want to sell the assets and not farm, then fine, the income is taxable, like any other investment income. If they want to keep the farm running, then income from the farm is taxable, but the farm may be inherited intact and tax free, until it is no longer used as a farm.

        1. Can you clarify your first sentence? Seeing "lifestyle changes" makes me suspect you are referring to the first part of my plan yet, nowhere do lifestyles affect the taxation. I prefer the traditional family, as I suspect you do, but I believe any government program, including taxes, should be blind to "lifestyle" choices.

          1. There are people who are infertile. They don't have children, not by choice, but because of their health issue. So, a child-number based income exemption forces these people to pay more tax for the rest of their lives simply because they were sick as a child and now are infertile or suffer from some other infertility issue.

            That seems unfair in the same way that the mortgage interest deduction is unfair. People who can't afford a house or people who buy modest homes pay more taxes than people who buy expensive homes. Basically, a "Let's tax the affordable places in the country extra so we can subsidize life in SF, NY, and DC." tax effect, only this time with kids.

            So if a couple decides that they can reasonably afford 2 kids, in the system you propose, they will be taxed more than the couple who just wings it when planning their family and ends up with 4 kids.

            Again, the number of children one has is a lifestyle choice. As a free citizen, you should be free to make what ever choices you want that don't harm others. If you want to have 6 kids, then go for it. If you want to have 6 kids, don't be looking to your childless neighbor to help foot the bill.

            1. Like my personal deduction, or for that matter any such personal deduction, the present one can be justified on the Constitutionsl phrase "to assure domestic tranquility". Of course, that's a kind of balckmail, but the modest degree of "progressivity" that produces is probably necessary for public acceptance. But the question of a deduction for kids goes to what is the core for my plan, a flat tax on "discrationary" income, that which exceeds a basic standard of living. Again, I base it on the minimum wage (if that's the least one should work for, why tax some of it away?) and ask that the minimum wage (or personal deduction) be reviewed each year. In that review, congress would face the conundrum whether to succumb to pressure for increasing the AMW or the pressure for more spending which wouold require either a reduced AMW or an increased tax. This last adds some flexibility to the program, the lack of which has destroyed so many others.

              Write soon!

            2. Like my personal deduction, or for that matter any such personal deduction, the present one can be justified on the Constitutionsl phrase "to assure domestic tranquility". Of course, that's a kind of balckmail, but the modest degree of "progressivity" that produces is probably necessary for public acceptance. But the question of a deduction for kids goes to what is the core for my plan, a flat tax on "discrationary" income, that which exceeds a basic standard of living. Again, I base it on the minimum wage (if that's the least one should work for, why tax some of it away?) and ask that the minimum wage (or personal deduction) be reviewed each year. In that review, congress would face the conundrum whether to succumb to pressure for increasing the AMW or the pressure for more spending which wouold require either a reduced AMW or an increased tax. This last adds some flexibility to the program, the lack of which has destroyed so many others.

              Write soon!

        2. I agree with your assessment of Congress, except I would attribute their missteps to corruption, not idiocy. The requirement that this is the only source of income, and that the budget shall be balanced, sets the stage for political warfare between those who would spend more ansd those who would hold down tax rate or raise minimum wsge and dedeuction. and that, I suggest, is a good thing.

          1. BRM, I believe you are interested in a serious conversation on this subject. Because the life of a blog is limited, and because I want you to have an unlimited amount of time to study my ideas, and I want an unlimited amount to study yours, let's communicate by voice amil. Mine is tbeebe6535 (at) yahoo (dot) com. Please write !

    3. Damn, that's what the Slovaks did. Take a look, they have one of the few European economies not tanking at the moment.

  22. Any plan to simplify the tax code obviously and immediately runs up against the shoals of everyone who's made decisions based on the status quo.

    Then there's that social engineering part. The other morning, the talk radio hosts were discussion the 9-9-9 plan. One host immediately says any tax plan would have to, HAVE TO, give deductions for kids. Because children are, there can be no argument, a social good. Set aside that some people do in fact argue against bringing more people into the world. Even before the debate gets serious, he's already lobbying for a bit of social engineering.

    1. Ya, and in a CNN interview, I heard Herman Cain contemplate outloud the creation of "empowerment zones" where the rates would be 3-3-3 instead of 9-9-9. Of course, the interviewer failed to ask a follow-up question. If I were conducting the interview I would immediately ask Cain what criteria the central planner would use to determine which areas are worthy of this preferential treatment. BTW, he threw Detroit out as a potential "empowerment zone." I guess the auto bailouts did not constitute enough preferential treatment of Detroit for him.

  23. businesses should be paying on Gross?


    I reckon two per cent would be more than plenty, combined with non-deductible excise and fee-for-service taxes.

    It's the only way to prevent the gaming and social engineering. You are allowed to invest in your business operations based on what you believe are sound economic principles, not government-induced churn.

    As I recall, the deductibility of general consumer interest ended in '86. This merely brought us the (ostensibly) unintended if not unforeseen home equity loan business.

    1. So business running on really thin margins are entirely fucked?

      Fuck you.

      While I oppose either, income taxing on gross instead of net is insane. I guess you are supporting what is basically a sales tax then. But if so, call it that.

      1. If the tax is uniform on all competitors it will quickly be pushed into the price that the business charges for its goods and or services. And will not affect profit margins either way.

        The real threat of a gross receipts tax is that it encourages vertical integration in response to tax pyramiding.

        That could be offset by exempting the first X amount of revenue or by keeping the rate extremely low, as in 1% or less.

      2. So business running on really thin margins are entirely fucked?

        Have you seen local business license taxes? In Virginia, at least, they are based on gross revenues.

  24. I think what this thread has ultimately proved is that INCOME taxation is a really, really, really stupid idea.

    Definitions are just to hard to figure out, you end up arguing over what is a legitimate deduction because it is a reduction in income vs a post-income expense and etc.


  25. "Allowed" was a poor choice of words; free would be better.

    And I remain completely unswayed by that "land tax" crapoloa. It "might" have made sense in some imaginary eighteenth century England blanketed by inherited agricultural estates, but not now.

    It's just an excuse to impose a "use it or lose it" scheme to coerce people to use their wealth for the benefit of some activist's definition of society.

    1. "Allowed" was a poor choice of words; free would be better.

      In the Libertarian world of whitewashing aggression, you're correct. Joseph Goebbels would be proud of your attention to detail.

    2. Land tax isnt crapola.

      1. No dead weight loss. No other tax has this benefit.

      2. It puts a cost to government recognition of property. Their are problems with defining property rights (see Mises) that it solves.

      Use it lose it? Exactly right. The Georgist idea is that any profits from your labor are yours, so any improvements are tax free, but the rent (in the economic sense) from the land itself isnt yours.

      Im not 100% convinced by the Georgist argument, but good enough for me.

      1. Isn't this a debate about whether to tax wealth, the possession of things of value, or to tax income, the (inward) flow of such wealth? What have economists said about this? I suspect they have said "on one hand it is better to tax wealth, and on the other hand better to tax income". Harry Truman once said he was searching for a one-handed economist.

    3. Isn't a land tax in effect ending private ownership of land, forcing one to pay rent to the federal government? I personally feel it is the most immoral of all taxes for that reason. My home is mine- I shouldn't have to pay rent to keep it (given that I actually own it).

  26. I guess you are supporting what is basically a sales tax then. But if so, call it that.

    I call it a "gross receipts tax". In its practical effect, it would be indistinguishable from a sales tax.

    Why are those margins so thin? Could they be in some way related to the costs both explicitly and implicitly imposed by current tax laws?

    "Adaptation is hard!" says Businessperson Barbie.

  27. Income taxation is hard. Consumption taxation is hard.

    But I like real numbers; the kind you get when a willing buyer and a willing seller agree on a "cash value" price.

  28. Since Tony and Dean are opposed to the mortgage deduction, I suppose that means they have a moral duty not to take advantage of it, huh? Just like Warren Buffett should pay higher taxes right now?

    1. Since Libertarians are opposed to the road taxes, I suppose that means they have a moral duty not to take advantage of roads, huh? Just like Warren Buffett should pay higher taxes right now?

      Such fun!

      1. How about we institute a small tax here at H&R to see if we can't fund the acquisition of a better quality of troll?

  29. you end up arguing over what is a legitimate deduction

    Exactly. As long as you let the government define what is and is not your "profit" you're fucked.

  30. Why not tax businesses on gross? If the author argues that the individual must pay taxes on his "gross," why are businesses so special?

    1. Gross what? You couldn't operate a local grocery store if you were taxed on gross income. You couldn't deduct the cost of buying the merchandise or paying the stockers and cashier.

      1. What if the rate were correspondingly set much lower?

    2. A sales tax is a tax on the business' gross. Their prices will include that tax if it is levied against them. Only people pay taxes. Sometimes the corrupt, aka politicians, tell them a business tax is on those dirty old corporations or some business entity. But where does that corporation get any money but from you and me, their customers?

      1. The implication that the tax change doesn't affect the corporation, however, is misleading. As the total cost of the transaction rises, consumers evaluate the purchase with more and more skepticism; and very few purchases outside of food, fuel and utilities are not optional in the final analysis. For instance, one of the reasons I don't buy a high performance auto is because the fuel is expensive; and the reason the fuel is expensive is because the taxes on fuel make it so. The price of the high performance car consequently rises out of my acceptability zone, as it were, and the corporation doesn't make the sale.

        So while customer do pay all corporate taxes, tax rates affect the number of customers.

  31. If the loop hole goes away overnight, people with middle class incomes will be crushed. If it is phased out, then the market, and the home owners may adjust. Or we might just see a zombie land real-estate market until the loop hole is gone.

    The loss of this loop hole will cause housing market to slump even further. The loop hole created a bubble from its inception. With its removal, people will not be able to afford the homes at the current prices.

    This loop hole created a give away for anyone buying a home, and it is anti-progressive. Most of the time, such a distinctive would be a good thing. In this case, the very rich will be able to afford it, those in the middle, who have their savings tied up in their home values, will see those savings disappear.

    Note, I am not against closing this loop hole, I would prefer a consumption tax, that has no loop hols at all -- if you save, you keep. We have had a bad idea foisted on the market. Still, is this a case were we really want a sharp downturn?

    People signed mortgage papers in good faith. Removing the loop hole capriciously violates the spirit of the contract that most all home owners have entered into. How does one not creat a condition that in effect violates the hundreds of thousands of property contracts?

    1. You make some fair points. I can see folks with existing mortgages being grandfathered in and some sort of gradual fade out of the deduction. I think most of us who support getting rid of this deduction, also agree that it needs a gradual phase out for many of the reasons you give.

      1. I wonder what happens to people like me, who saved until they had the price for the home and then bought the home outright, rather than borrowing?

        Someone going to hand me a gift for being responsible?

        No, I thought not.

  32. End all deductions except those which "assure domectic tranquility"'(the personal deduction) and those which build the tax base by enhaning productivity (health care, education and investnment) All else are special interests.)

  33. Reason keeps posting these articles but nobody has explained how the interest deduction is a benefit to the "Upper Class". As income goes up, the Alternative Minimum Tax phases out all deductions.

    How can somebody deduct $1.1 million in mortgage interest when I can't deduct all of my $10k or so? Is my tax accountant doing it wrong or is this article BS?

    (I am all in favor of lower taxes without deductions, I just don't believe it is a big benefit for the rich)

    1. Because renters etc have to pay a higher rate in taxes than they otherwise would.

      Also, they aren't deducting 1.1 million in interest, they are deducting interest on a 1.1 million loan.

      Of course depending on the return they might be able to deduct less, but there are many higher earners that get to deduct the same thing.

      For example, a household that made 200k a year might reasonably have a house that cost 600k. At 5% interest they would have 30,000 a year to deduct. Or probably about a 10,000 reduction in their tax bill.

      1. The AMT code is so complex that nobody understand it. But, speaking from experience, with a family income of $200k in New Jersey, you will hit the AMT. Your deductions, including mortgage interest will start to be phased out. Incremental income after that is taxed at your full-fair rate of at least 33%.

  34. As income goes up, the Alternative Minimum Tax phases out all deductions.

    To a point. Warren Buffet seems to have avoided AMT. If you can afford black-belt CPAs to do your taxes, AMT does not apply.

    How about this. Everyone will use TurboTax version 1.0 for DOS or a paper EZ form and be allotted no more than 4 hours to complete his tax returns.

    1. Warren Buffet's company pays corporate taxes - then the company pays Buffet himself a relatively small salary.

      1. A small salary. I own a company too, and my company pays me. If I use Intuit to do my personal taxes, I will pay AMT for any income over about $90,000. But if I pay a so-so CPA to do both my business and personal taxes, no AMT. The difference is enough to cover the cost of having him do it for me, and then some.

      2. The vast majority of Buffett's income comes from dividends and capital gains - not from wages.

        1. Dividends and capital gain are just a subject to AMT as wages.

        2. Only people pay taxes! Anybody care to debate this fact? Buy from a corporation and you're giving them the money to pay "corporate" taxes. Same with any business. The only difference is that business taxes are a way for politicians to hide from you part of what you pay for government services and payoffs to their campaign contributors. Lets all recognize these realities and debate on acknowledging its about what WE're paying.

  35. You couldn't deduct the cost of buying the merchandise or paying the stockers and cashier.

    So what?

    If the marginal return of that stocker isn't net positive, why is he there?

    Are you selling your stock at a loss on purpose?

    Apparently, you think for some reason you'd be paying a 35% rate. That's your error.

  36. With no deductions for the cost of doing business the only businesses that would survive would be vertical point-of-manufacture to point-of-sale (to the end-user).

    Taco Bell.

    You's have to own the cows (or whatever), the farms, the grain mills, the distribution centers, the trucks, and the restaurants, to avoid an intermediary, subject to a tax killing custody transfer.

  37. Class warfsre anyone?

    1. ...warfare...

  38. I deduct the interest on my mortgage every year, it's the only thing that helps me balance my own budget. I'm not married, and I'm white, making 37k a year for supervisor work.. How much more do you want me to suffer?

    1. Well, you could be married.

      1. Now that's funny!^

        1. hahaha, I have a girlfriend that runs me broke.. might as well be married. I just hate commitment 😉

      2. A nice one! 🙂

  39. 50% of homeowners no longer have mortgages. Presumably they benefitted from the MID when it applied to their situation. It's not appropriate to include them in the ranks of people who don't see a benefit from the MID.

    For almost all itemizers, the deductions are dominated by mortgage interest and property taxes. Itemized deductions are taken in lieu of the standard deduction. Therfore, what is the standard deduction if not a somewhat generous minimum estimate of these expenses? This explains why a significant fraction of mortgage holders don't itemize. They're getting a better deal. And why should renters get the standard deduction at all?

    Eliminating the MID just replaces one market distortion with another. It favors corporate ownership over individuals.

  40. "That's because rent tends to be cheaper and more flexible than mortgages,..."
    If you compare apples to apples this is demonstrably not true. You can not rent a house for less than it would cost to buy that same house.

  41. Sometimes you can, like when property values are being driven by unrealistic expectations of appreciation. At the height of the bubble some urban properties with existing tenants were selling for negative cash flow.

  42. The tax code should have no deductions, a fair and properly apportioned tax code used solely to fund needed government rather than to influence social/economic activities and administered fairly would be the same rate for everyone and no one would have deductions.

  43. Low flat federal income tax rate on ALL incomes for ALL people earning recorded incomes from employment and investment.

    No (zilch) deductions. No credits. No mail-in rebates. Absolutely no progressive crap or social engineering. Fuck that shit.

    Corporate taxation is bullshit because it has the problems of being double taxation, as well as the whole net versus gross thing. Tax the income that individuals earn from working for or investing in businesses instead.

    All money that individuals spend is rightfully considered consumption, gross vs. net income doesn't apply here.

    Sales taxes are fine if they are a single flat rate for all goods and services.

    Fuck private property taxation. This needs no explanation.

  44. Being able to write off my interest was the only reason I bought my home. I could have rented for a lot cheaper.

    1. You're welcome.

    2. You're welcome, slaver.

  45. All interest as an expense be it personal, business or corporate should be eliminated.

  46. 35 percent of the total, is the mortgage interest deduction. This l

  47. policy objection of promoting homeownership. As Congr

Please to post comments

Comments are closed.