Thursday, December 2, 2010

want to subsidize the wealthy? keep the home mortgage interest deduction

This came up in a thread on Facebook.

I knew the logic behind this:
One has to itemize deductions to get the subsidy-- and then the gain is only the amount of the itemized deduction over the standard deduction. In 2009, the standard deduction for married couples was $11,400. So, unless your mortgage interest and other deductions (most notably, charitable contributions, state/local and property taxes) exceed that amount, the mortgage interest does not reduce your taxable income. And if you have mortgage interest of $5,000 but total deductions of $12,000, then you only get $600 over the $11,400.

From there, you multiply by
the relevant marginal tax rate (MTR). Both the itemized deduction and the MTR typically increase with income, so it follows that the wealthier should be expected to benefit (greatly) from a policy that will do little for the middle class and nothing for the poor.

Someone pressed me for numbers, so I dug this up from the (lean-lefting) Urban Institute...

The annual benefit of the home mortgage interest deduction: $2,639 for the top quintile ($4466 from the top 5%) vs. $215 for the middle quintile vs. $2 for the lowest.

Who could love a policy like that?


At December 2, 2010 at 11:23 AM , Blogger Chris said...

This is a noteworthy sham on the American people. Most people don't get into the numbers far enough (thanks to TurboTax, H&R Block and tax advisors) to notice that they could be paying $1000 of mortgage interest in order to save $300 from their tax bill - netting a $700 payment to the bank.
Why not eliminate the mortgage interest and save that $1000 - with $300 going to taxes? You are netting $700, not the bank.
The sham is that the government lets you think that you are sticking it to the 'man' by writing off $300 on your taxes, when in reality, you are sticking it to yourself by buying a house on the installment plan!!

At December 2, 2010 at 1:20 PM , Blogger William Lang said...

How much of the present budget deficit would be eliminated if we did away with the home mortgage interest deduction?

Regardless of the mortgage interest deduction, I think home ownership still makes good sense in the long run for many people--especially if you finance over 15 years instead of 30 years.

At December 3, 2010 at 8:46 AM , Blogger Eric Schansberg said...

Apparently, $76 billion in 2006.

Home ownership often makes sense although it's, pardon the pun, oversold. For example, if you're not going to live somewhere for more than a few years, you're going to take a beating on closing costs.

And yes, absolutely, people ought to check out the (modest) difference between payments under a 15-year and 30-year payment plan.

One other piece of financial advice: work to put down 20% in terms of equity; if so, you can avoid the cost of PMI (and later, the costs of getting out of it).

At December 3, 2010 at 8:56 AM , Blogger Eric Schansberg said...

Digging around a little more, the Tax Foundation has been cited with an estimate of $100 billion for 2009, but I can't find the report on their website.

At December 3, 2010 at 9:57 AM , Blogger William Lang said...

Thanks — that's not an insubstantial amount. But when we're running such large deficits, it's high time to put everything on the table. (This is why I really am hoping the Bush tax cuts are left to expire—they are adding several times that to the deficit. Four trillion over ten years, if I heard correctly on public radio this morning.)

At December 3, 2010 at 10:01 AM , Blogger Eric Schansberg said...

Apparently, this one little ditty would be $1 trillion over ten years!

At December 3, 2010 at 10:39 AM , Blogger Jenna said...

What about attacking the ludicrous government spending instead of taxing the citizenry into oblivion?

At December 3, 2010 at 10:58 AM , Blogger William Lang said...

Jenna, it's imperative to eliminate the budget deficit—we must let go of the tax cuts if we are not able to cut spending.

At December 3, 2010 at 11:01 AM , Blogger Jenna said...

I should say that I own my place of residence "debt-free" -- paid off about year 7 (of 30 year loan). I have always thought the mortgage interest write-off was a sham.

However, in my opinion, allowing the government to take/keep ANY more of the people's money than the current exorbitant amount, is criminal!
Furthermore, it will not solve problems.

At December 3, 2010 at 12:26 PM , Blogger Eric Schansberg said...

I also get a kick out of people being excited to pay a bank $100 to save $10-15 in taxes.

At December 7, 2010 at 3:28 PM , Blogger Chris said...

Perhaps a neutral solution is in order so that we can start from a clean sheet of paper:
Eliminate the mortgage interest deduction but ALSO reduce gov't spending by the same amount, which would be a zero sum gain - i.e. no new taxes and no new deficits.

The only problem with this solution is that it requires you to trust politicians...

Politicians are humans, however, and therefore, by nature, are untrustworthy when it comes to large sums of money and power.

This is the essence of why the founding fathers sought to LIMIT the power of government.

Pretty easy to understand, really - small government = good for the people; large government = bad for the people

Unless you are a part of the government, that is!


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