November 24, 2009
NPR: The Home Mortgage Interest Deduction
Check out the 6-minute segment on NPR's All Things Considered, Is Tax Deduction for Home Mortgages a Bad Idea?:
(Hat Tip: Claudine Pease-Wingenter.)
The tax deduction for mortgage interest is a cherished benefit for millions of Americans, but most economists think it's a bad idea. One of those economists, Dennis Ventry of the University of California-Davis, talks to host Guy Raz about the history of the deduction, and why the odds of changing it are so long.
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It is great to see an article tracing the history of the mortgage interest deduction and the problems it causes. It is unfortunate that this significant deduction has become an "entitlement" of the income tax. In a recent presentation on tax issues I referred to the home mortgage deduction as a subsidy. This caught a few by surprise - they said they never thought about it as a subsidy, but did after my comments.
Perhaps more discussion in broader groups (beyond tax practitioners) would lead to reform in this area. When President Bush's Tax Advisory Panel recommended reforms including converting the deduction to a credit, it was ignored and an opportunity for better understanding this deduction was lost.
One approach I have been advocating is for states to start phasing out the high dollar amount, the home equity deduction and the second home benefit. States are in desparate need of revenues and often seeking it from higher income individuals, such as those who have second homes and high mortgage balances. These individuals would still get the federal subsidy (until Congress pushes for reform in this area).
Such a change at the state level could also be promoted as encouraging other types of investments, such as businesses located in the state.
Posted by: Annette Nellen | Nov 24, 2009 12:18:43 PM
From the interview: "So to the extent that these subsidies get capitalized, it raises the cost. So some economists say that, in fact, the home mortgage interest deduction in combination with property tax deduction actually artificially raise housing prices by as much as 25 percent."
If so, ending the deduction would lower prices by 20 percent, undoing that 25 percent increase. With 25% of homeowners owing more than their property is worth, changing policy in a way that cuts property values by 20% would be stupid. Ventry claims all non-bribed economists agree that the deduction should end. In today's economy, I don't believe that assertion.
Theorists love to advocate radical tax changes, blithely ignoring the huge dislocations and other transition costs. The S&L crisis post-1986 Tax Reform is just one example.
Posted by: AMTbuff | Nov 24, 2009 1:49:52 PM
It is really interesting to know that someone has tried to trace the history of mortgage interest deduction and all the aspects involved with it. I have liked the posting a lot.
Posted by: Home Mortgage San Antonio | Nov 25, 2009 1:26:58 PM
What about the part wherein the mortgage interest deduction has become so complicated. See the '09 GAO Report to the Joint Committee on Taxation (Rangel & Baucus)about the complex tax rules and IRS could enhance enforcement and guidance. Tax practitioners often have a difficult time even determining the correct amounts of qualified home acqusition mortgage interest vs. deductible equity interest, and the adjustment for alt min tax purposes on home equity interest, nevermind the bogus rental property mortgage interest deductions on equity cash outs. Hardly ever does anyone read or hear on the media about this, nevermind how practitioners enjoy telling clients they have non deductible mortgage interest. Another abuse in the mortgage business wherein brokers etc. infer, sure it's all deductible.
Posted by: don | Nov 25, 2009 3:03:12 PM