i agree with every criticism of the mortgage deduction, which was a bad idea from the start.

i do not agree with the solution - indeed, i've been looking for an agreeable solution for years - in that the solution will harm people who currently own homes whose prices embodied the mortgage deduction. how does this proposed solution help those people?

END THE MORTGAGE DEDUCTION!

Oh Yeah!

That'll encourage the purchase of the glut of homes that's crushing the economy!

Smart thinking there, Brainiac.

every day - every single day - we get to be astonished at how the el viajero brain works.

the mortgage deduction does not make housing more affordable, since sellers know about its existence too. the argument against eliminating it has to do with financial harm to existing homeowners: it would make no difference at all to the buyer, since prices would adjust downwards without it.

Howard - the people "harmed" here is a relatively small group who by and large should be able to absorb the damage. My perspective may be skewed since I live in a house I bought almost 20 years ago, but people carrying mortages (not living in homes, but carrying loans) between $300K and $700K who aren't already in trouble should be pretty far to the right side of the income bell curve. If the impact is bad, perhaps the phase out should be longer for existing loans, bet we have to transition out of this system. And as Ezra points out, this is a pretty good moment for it.

Or maybe allow deduction of principal payments rather than interest, which would encourage equity instead of debt.

this would really destroy housing prices. By, say, 20-30% instantly, because that's the tax break people get. That's the problem.

I say go for it -- this is a good idea whose time has come.

This is one of my hobbyhorses, along with ag subsidies. A pox on the mortgage interest deduction. It isn't just that it's regressive, or that poor folks "often don't" itemize, it's that the tax code tells them not to. If you stay within your means, the standard deduction is better than itemizing, even if you own a home.

I do, however, agree that the proposed solution is not the best, either as policy or politics. The Obama campaign never suggested axing the deduction, which at the moment is indeed politically inviolable. Obama did propose a 10 percent universal mortgage credit. Enact it, ideally with a cap, say at regional conforming loan limits so high-cost residents don't get screwed. That immediately ends the need to itemize, and immediately makes it no better to overpay, at least once you hit jumbo-loan territory.

Once you have a credit in place, once most people are taking the standard deduction plus a credit instead of itemizing with the interest deduction, and once the economy is doing better -- then you kill the deduction dead. If possible, remove it immeditely; if not, lowering the cap to the same conforming limits, and it's dead anyway, since interest rates aren't going to 10% any time soon.

TL - that still encourages the buyer to finance as much of their equity as possible. We need to stop the incentives to treat this as "good debt."

spot check billy, i'm not alex at 10:57 - i can't say how much prices would be affected, because i don't have access to the data that would tell us.

but i wouldn't only be homes above $300K: the entire housing market is priced higher because of the deduction. eliminate the deduction and all prices should adjust lower.

and even people at, say, the 95th percentile of income owning a $700K house notice if it falls 10 - 15% in value....

i truly wish the deduction had never come into existence, and i can appreciate the notion of saying "hey, prices are falling anyhow, why not get rid of a bad policy in the general price-falling atmosphere," but i think the last thing we need right now is further wealth destruction in the near term.

Academic discussion, and not very interesting, because there is no political there there. Removing it or cutting it back just isn't in the cards. Why spend political capital when all the capital-spender gets is a black eye?

Since the existing deduction is regressive, counter the regressive effect with a 'housing' (not mortgage) tax CREDIT (not a deduction). Magically renters and low income folks are equalized and nobody has 'birthright money' taken from them (as the mortgage interest deduction is currently viewed by its holders).

I have no problem at all with capping the deduction - it's absurd that it's (effectively) uncapped now - but this:

The deduction is only available to those who itemize their taxes. Low-income folks often don't itemize. And so they don't get the deduction.

Is just dumb. Why don't low income folks itemize? Because the standard deduction is bigger than their itemized deductions would be. But, if they have a mortgage, then the mortgage deduction - all by itself - is (almost always) big enough to merit itemizing. I suppose it's possible that there's a large contingent of low income people out there who have their shit together enough to buy a house but have no idea - despite the mailing they get from the lender every year - that they should be itemizing. But I doubt it. Instead, I think that wonks take a generalization about a group that is overwhelmingly not homeowners - "low-income people don't itemize" - and then apply it to homeowners in that group. Glaeser's paper, I might add, provides no evidence for his assertion.

My data point: as a mid-income (~50 percentile) individual with an inexpensive house (~50% of median), the mortgage deduction is pretty much a wash with the standard deduction; it's only some other items I'm able to claim that make it worthwhile. But I doubt that the amount of my mortgage deduction is typical, given my interest rate, payment term, and low principle.

This is a great proposal if you want to throw the Republicans a nice, high pitch they can knock over the fence. Not gonna happen.

Perhaps eliminating the tax provisions for excluding gain on the sale of a principal residence should be considered. At the present time this would impact almost no one and in the future, it just means taxing unearned income.

Has anyone suggested changing the way mortgages are paid off? My understanding is that the complex formulas banks use assume a 30 year life to the loan and then front load the interest payments in the early years. This provide a larger deduction for taxpayers, but insures that the bulk of the principle remains on the books. How about a formula where the principle is paid off more regularly over the life of the loan, thus reducind interest payments?

If you take away the mortgage deduction, though, then you need to restructure a lot more of the tax code. For example, in order to make my wife's business (as a self-employed partnership) more profitable and avoid sending a crapload of taxes to the government, we were advised to buy a house. Without the tax deduction of the house, there was no point in opening a business, because the tax burden compared to the work required would have sucked all the value out of it. With the mortgage deduction, both the small business and home ownership became possible.

That's not to say that there isn't some middle ground or better solution. There probably is, and I know I'm not the person to design it. That said, I used to be gung ho about a lot of this kind of thing, until I got married, had a kid, owned a house, and helped my wife start a business. There's a problem with people who don't do these things advising people on how to do them.

The deduction is only available to those who itemize their taxes. Low-income folks often don't itemize. And so they don't get the deduction.

I see this a lot, but it makes no sense to me. Can someone explain how this can possibly be the case?

The standard deduction for a married couple is about $10k. Any mortgage on a home bought recently is going to have annual interest payments greater than that. And then there are other things you can throw in there, like your property tax.

Even on say a $250,000 home, a low-income person is gonna do better itemizing. Granted, not a LOT better, but still better.

Unless I'm misunderstanding something. Can anyone point to data that actually shows that a lot of homeowners do not pay enough interest to deduct from their taxes?

Rather than making housing more affordable, it makes sellers richer.

This is one of the silliest things I've read in some time. Yep, and it makes buyers poorer. Until they sell, at which time they get "richer" til they sell, at least.

Not saying having some sort of phasing of the mortgage deduction is a bad idea per se. Well, other than politically--it's political suicide. But if American politics were some sort of computer-generated simulation, it might be a GREAT idea.

Of course, while we're contemplating political suicide, I'd like to put in a vote for weighting against regional housing prices. So the coastal megalopolii would cap at, say, $600k, and the mortgage deduction in the square states would cap at $300k.

Also, this conversation -- as all federal level tax conversations do -- don't take into account regional costs. A $400,000 mortgage in San Jose, CA is not the same as a $400K mortgage in Portland, OR.

Great idea. Not going to happen. I'd gladly settle for merely allowing inflation to erode away the value of the MID over time.

How about a formula where the principle is paid off more regularly over the life of the loan, thus reducind interest payments?

It's called a 15 year mortgage. Principal payments exceed interest within a few years and interest over the life of the loan is drastically reduced. The downside is that, other things equal, the monthly payment is 20-25% more.

What JRoth and ResumeMan said.

I also have two other questions:

(1) How is one going to implement the revocation of the mortgage interest deduction, something that has been part of the tax code for a very long time. In fact, it is part of the tax code of much of Western Civilization and for good reason. (see my, (2))
(2) Isn't it good government policy to promote home ownership? Anyone who has lived next to a renter knows that they just don't take as much care of their property as when they own it themselves. It's just human nature - I was guilty of it myself when I was a renter. By promoting renting, you also promote another group of primarily wealthy people and corporations, that is landlords.

Certainly there should be some kind of income cap, but I think that that is what AMT is for as well, that is limiting the availability of deductions for wealthy taxpayers.

One final observation - I note over the Internets that the primary proponents of repealing the MID are renters themselves. That is not meant to a value statement, solely an observation.

MA allows renters to deduct rent paid (or a portion of it) on their state income tax (although I did not know this until the last year I lived in MA).

This seems like a far more sensible and progressive system.

>>It's called a 15 year mortgage.

I guess my question, which admittedly is off topic is whether a 30 year mortgage structured to return more of the principle earlier in the life of the loan would be a better deal for the borrower? Is the current formula designed to maximize bank revenue?

What if we started by eliminating the tax deduction for second homes? What is the government's interest in having folks own two homes?

Getting rid of mortgage tax relief was the ONLY good thing Margaret Thatcher did as Prime Minister. Never particularly large to begin with (capped at the interest on 30,000 pounds), she first allowed the deduction to apply to only the lowest rate of tax thereby capping the maximum benefit at some small amount and then got rid of it altogether.

There is no deduction for second homes. That deduction went out with Reagan.

C'mon, kids, please keep up: Obama during the campaign proposed a 10% universal credit. That is actually on the table, though it has disappointed me that the administration did not float it as part of its various recovery efforts. Once you have a credit in place, the deduction is no longer inviolable. You can cap the credit and deduction together, or simply replace the deduction entirely. No political suicide. No fuss. No muss.

[W]eighting against regional housing prices already happens, ibc -- check out conforming loan limits. We already have a process in place. Let's use it. I am shocked you argued for subsidizing house prices. How this benefits anyone but sellers eludes me. New buyers eventually get their own subsidy, but until then ownership is more precarious. The current economic fallout is as bad as it is in no small part because of the subsidized price level. And losing your job means losing your subsidy. This is good policy how?

This deduction is part of the tax code of much of Western Civilization the way a hook fits into an eye: a fishhook; a human eye. US tax code for residential housing is unique, just like its non-recourse, fixed-rate, embedded-option mortgages. Yes, it's mostly we renters who rail about this, because we're no co-opted. Asking a homeowner to be reasonable on this issue is like asking an Iowa corn farmer to be reasonable on ag subsidies: ain't gonna happen. And apparently, asking a homeowner to have the first clue about non-US tax codes isn't going to happen, either.

..oh, and mortgage interest deduction generally is immune from the AMT. DBaker, I hope you have an accountant do your taxes.

Cf http://www.irs.gov/newsroom/article/0,,id=136889,00.html

I think a better way would be to eliminate the deduction for existing homes (prospectively and phased-in) and simply give all taxpayers a standard housing/rental deduction of $10 thousand or so per year.

Case closed!!

Why do you guys hate the city folk?

All these programs that cap at hard-dollar values ignores the very real differences in cost of living. Cap it at 1.5X the county median, or based on prices in the metro area/county.

My family does very well compared to the national average, but we're not rich by local standards. Far from it. We'd very much appreciate some acknowledgement of that in our policies.

And, this is from that left who are supposed to represent densely populated areas?

I'd feel really bad for folks in NYC!

All these programs that cap at hard-dollar values ignores the very real differences in cost of living. Cap it at 1.5X the county median, or based on prices in the metro area/county.

Why should taxpayers subsidize those who choose (Yes CHOOSE) to live in the large cities?

Wanna live there? Great! Just don't ask the rest of us to pay for it!

.oh, and mortgage interest deduction generally is immune from the AMT. DBaker, I hope you have an accountant do your taxes.

Nice snark, dude/dudette. I don't make enough money to even come close to having AMT issues. I was perhaps too quick in that particular comment - in talking about caps in the previous sentence, I was naturally assuming that said Rev. Ruling would legislated out of existence. (the lack of "preview" on this site adds to the problem, IMO)

The reason I brought up Western Civilization is that there are obviously bona fide reasons why many countries have the mortgage interest in place for long periods of time.

As a renter, you do not address two of my other points, that is doesn't ownership provide responsibility and, by promoting renting, don't you advance the interests of landlords?

Now, I certainly agree with the linked article that MID is a very regressive measure, hence my advocacy for caps on the amount of MID available, and scale it for income.

My problem with the linked article is especially point 5 and it sends up a red flag that this all sounds wonderful in theory, but has not been thought out in the real world, especially on the implementation side of things.

This would destroy our family finances, and would be more than enough to get me voting Republican for the first time in my life.

I'm for ending the deduction, but in turn we need a tax overhaul that treats all taxpayers fairly, not just those weatlhy enough to own homes.

This would destroy our family finances, and would be more than enough to get me voting Republican for the first time in my life.

do not blame renters if you feel a property is not being taken care...blame the owner...after all-- they are the one being subsidized with the MID.

Talk about a hard sell. I would suggest, for anyone who advocates for this, that they present all the changes that are going to make it worthwhile to get rid of the MID prior to suggesting getting rid of the MID.

Better one bird in the hand than two in the bush! I'd rather stay with my regressive MID than trust that other changes are actually going to be beneficial to me. Particularly when the people who are trying to sell the MID elimination are spouting nonsense such as low-income people don't itemize. Maybe generally, they don't - I know I didn't before I became a home owner. But once I bought a house - indeed, one of the reasons I wanted to buy a house - was the MID, so I itemized, even though we were on the high end of lower income.

The second home interest deduction is still alive and well. Here's the link to the 2008 IRS fact sheet.

http://www.irs.gov/pub/irs-pdf/p936.pdf

Cap the deductible mortgage amount at $300k. Let's see here:

1. Every house in the DC area that is not a shack costs more than $300k.

2. Congressmen live in the DC area.

3. The staff who work for the Congressmen live in the DC area.

4. The lobbyists who lobby Congressmen live in the DC area.

5. The $300k cap would devastate pricing of houses costing more than $300k.

6. Ha ha ha! Try again!

DBaker, a native Californian, I can assure you that the word "dude" in that context applies equally well to any gender. Continuing:
- there are obviously bona fide reasons why many countries have the mortgage interest [deduction] in place
-- Eliding the fact that not 'many' but only a handful have it, good aims are no reason to make bad policy.
- doesn't ownership provide responsibility
-- Probably. But the deduction does not promote ownership. It does the opposite: it raises prices and makes ownership more difficult.
- by promoting renting
-- I am not promoting renting. I am promoting owning, since adding a credit and eventually supplanting the deduction makes ownership more affordable.
- don't you advance the interests of landlords?
-- Um, no. Aside from advocating a credit they can't get, removing a price subsidy and lowering home prices would tend to lower rents, not raise them.

Vidor, if your finances are on the brink, I'd bet dollars to donuts a 10% universal credit plus the standard deduction would leave you better off, not worse. But run the numbers and let me know how it looks.

griffin, my mistake. Thanks.

maurinksy, by and large, wcw has already answered your comments, but let's make sure you understand the basic point: the mortgage interest deduction isn't helping anyone.

what matters for a mortgage is your after-tax ability to pay. virtually by definition, sellers, who are as aware as buyers of the mortgage interest deduction, can jack up their price higher.

to make this concrete, let's say there was no mortgage interest deduction and you could afford $1000 of your after-tax income on a mortgage. that translates back into a house price.

now let's say there is a mortgage interest deduction and you can therefore afford $1200 of before-tax income because your tax bill is $200 lower.

all you've done is offset - your ability to pay remains $1000 after taxes - but now the $1200 defines the base point for figuring out the house price, not $1000.

the problem with getting rid of this distortion, as i noted above, is that it's baked into housing prices and would be a painful transition, but artificially raising house prices is hardly a policy we should be supporting.

more generally, low-income people by and large don't itemize because, by and large, it's not worth it for them. it's certainly possible to be a lower-income houseowner and find a reason to itemize, but truth is, that's a very small percentage of low-income households.

End the mortgage deduction .. along with tenure for college economic professors

Isn't it good government policy to promote home ownership?

The mortgage interest deduction just promotes higher home values.

People who don't understand this relationship don't understand economics.

but yeah, the sunset should be 10% per year over 10 years, starting 10 years from now, not just changing the rules on everyone immediately.

Unfortunately, we lack sufficient competency in our government institutions to work on these time scales.

The mortgage interest deduction just promotes higher home values.

Ummmm....isn't the lack of higher home values the reason why the economy tanked?
I mean, how fuckin' smart to you think it is to promote lower home prices NOW (dumbass)??

I mean, how fuckin' smart to you think it is to promote lower home prices NOW (dumbass)??

Try to stay on topic. Somebody above implied that the deduction "promotes home ownership", when the opposite is the case.

As for your above point bracketed by personal insult, if you actually read my response you see I think we should phase any changes in starting 10 years from now.

Ummmm....isn't the lack of higher home values the reason why the economy tanked?
I mean, how fuckin' smart to you think it is to promote lower home prices NOW (dumbass)??

No, the reason the economy tanked is the higher home values. People couldn't pay their mortgages because the cost of the debt was too high. Lower prices are (eventually) the way out.

You are correct, Sir.

This was a typing error. I think my second sentence demonstrates that.

Thank you for pointing this out.

Anonymous @ 12:30 - why can't they structure the 30 year loan to pay off more of the principal early? Because if they did that, it wouldn't be a 30 year loan. Paying off principal is what makes the loan shorter. Interest payments are simple mathematics, pretty much impervious to government fiat.

As for how to get rid of the MID -> reduce the amount you can deduct by 5% a year for 10 years, starting in 5 years. That should give everyone the chance to adapt, and the hit each year will be small, proportional and easy to plan.

As for the people who say that "getting rid of the MID would cause me to vote Republican" - this is why communism doesn't work - people are just too damn self-interested.

This is brain damaged.

Anyone who actually DOES taxes realizes that for the overwhelming majority of people the one thing that decides between itemizing and not itemizing is whether or not you have a mortgage.

Aside from that the deduction is irrelevant. Arguing that it provides some sort of perverse incentive to do anything in particular is ridiculous.

I want a house and the deduction makes that possible for me.

I do not want to be a real estate baron. I wouldn't have enough money left to diversify. So no amount of deduction is going to encourage me to buy a second house. Ever.

Finally, debt is always bad. It is better to have no debt and not itemize than to have enough debt to itemize. When my mortgage is paid off, I will no longer itemize. It is that simple. The interest deduction makes it possible for people like me to own a home but it does not tempt us to be insane.

As a libertarian, I seldom agree with Ezra, but I'm 100% with him on this one, for all of the 5 reasons he articulated so well.

I just wish more people on the Left would realize all of the others areas of our economy in which decision-making is distorted in destructive ways by government subsidies and control ( education and health care, for example ).

Canada doesn't have a mortgage tax deduction, and has the same rate of home ownership as the USA.

Food for thought.

Wouldn't it be better to just abolish the income tax entirely?

The feds spend without regard to their tax receipts. The tax was never ratified. It's unconstitutional. It's marxist. It's contrary to history. It enslaves the people, and is used to engineer social outcomes.