Mortgage deduction: The counter-argument


In my recent column on the home mortgage interest deduction (MID), which could be curtailed by Congress as it deals with the "fiscal cliff" and the national debt, I asked for response from readers. I want to share an exchange with one letter writer, an opponent of the MID:

"The home interest deduction ought to be reduced and phased out. It, along with other magnanimous government interventions (like Freddie Mac policies), led to the housing bubble in the first place — more so than the indecipherable derivatives market. Remember your Economics 101 — distorting the supply-and-demand curves always results in some price to pay, namely the housing bubble of 2007.

"If we need to increase taxes, we might at least think about simplifying the massive tax code and regulations. By the way, Congress might give the IRS enough money to actually collect the taxes owed. The government has so thoroughly insinuated itself into the housing market its hard to figure out what a business does because it wants to make a profit and what it is forced to by regulations.

"Anyway, what about renters? No interest deduction for them."

— Steve Powers, Sarasota

In response, I asked: Are you saying the mortgage interest deduction, which has been around for decades, caused the recent bubble? I took Econ 101 and American history. Fiscal policy after 2000 diminished the value of the deduction because interest rates were kept low.

Powers replied: "I am not saying the mortgage interest deduction caused the housing bubble, merely that it contributed to it. The MID is estimated to cost the treasury $108 billion a year. The benefits are skewed toward the upper-income bracket and indirectly discriminates againt renters (and therefore cities). Of course, the building industry lobbies for it. The National Association of Realtors predicts a 15 percent fall-off were it removed, but they are obviously biased and exaggerate by roughly 12 percent.

"Home ownership has been granted special status almost since the beginning of the 1913 tax code, but I do not think it is a reasonable goal for all, as we recently found out with the easy-loan policies up to 2008 pushed by Fannie Mae and Freddie Mac."

The Herald-Tribune is blessed to have countless readers who are intelligent, critical thinkers.

It is worth noting that only about a quarter of American taxpayers who have mortgages actually take the deduction, USA Today reported this week after analyzing IRS data.

The deduction, limited to interest paid on mortgages used to aqcuire or substantially improve first or second homes, can only be taken by taxpayers who itemize their deductions.

If the total amount of deductions does not exceed the standard deduction, then itemizing is not warranted. That can be the case for many owners with small mortgage balances. And with interest rates so low, the deduction for owners of new mortgages is not worth as much as it had been a few years ago because they are paying less interest.

Harold Bubil

Recipient of the 2015 Bob Graham Architectural Awareness Award from the American Institute of Architects/Florida-Caribbean, Harold Bubil is real estate editor of the Herald-Tribune Media Group. Born in Newport, R.I., his family moved to Sarasota in 1958. Harold graduated from Sarasota High School in 1970 and the University of Florida in 1974 with a degree in journalism. For the Herald-Tribune, he writes and edits stories about residential real estate, architecture, green building and local development history. He also is a photographer and public speaker. Contact him via email, or at (941) 361-4805.
Last modified: December 11, 2012
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