, 130 Tax Notes 1110 (Mar. 7, 2011):
Beverly Hills is home to the stars. Clarksdale, Miss., is home to the blues. ... Beverly Hills 90210 and Clarksdale 38614 both have a population a little above 20,000. But that's where the statistical similarities end. The IRS compiles individual tax return data by ZIP code. The latest year available is 2007. The data show total adjusted gross income in 90210 was $5.6 billion, 20 times larger than the $266 million reported in 38614. In Beverly Hills, 47% of AGI are dividends and capital gains. In Clarksdale the figure is 7%. In Beverly Hills, only 4% of filers claim the earned income tax credit, while in Clarksdale 44% do.
Providing about $100 billion of tax benefits annually, the mortgage interest deduction is the nation's largest housing program. So where are these subsidies distributed? Those readers with some scintilla of idealism might hope it goes to those most in need. So naïve! The tax benefit provided by the mortgage interest deduction flows overwhelmingly to rich families like those portrayed in the hit television series Beverly Hills, 90210. We've done the math and, as shown in the figure, the average annual per-person tax benefit provided by the mortgage interest deduction for the residents of 90210 is $1,873. For the residents of Clarksdale 38614, it is $45.
There are three reasons for this huge disparity. First, the rich have larger houses and larger mortgages than the poor. Second, the deduction is available only to itemizers. While almost all high-income taxpayers itemize deductions on their returns, very few of the poor do. Finally, the rich have much higher marginal income tax rates than the poor.
The gap in benefits between Beverly Hills and Clarksdale is only one example of the unfairness of the mortgage interest deduction. There are dozens of ZIP codes like 90210, with exorbitant housing. There are hundreds of impoverished ZIP codes like 38614, where the mortgage interest deduction provides only trivial benefits. Some examples are shown in the table.
[I]t is fair to say that among tax experts, there is a consensus that the mortgage interest deduction should be trimmed and that the bulk of that trimming should come from high-income taxpayers with big mortgages who enjoy disproportionate benefits. But you will not hear any members of Congress calling for reductions in mortgage interest deductions. Just the opposite.
On January 6 Rep. Gary G. Miller, a Republican from Orange County, Calif., introduced H. Res. 25, "expressing the sense of the Congress that the current Federal income tax deduction for interest paid on debt secured by a first or second home should not be further restricted." There are 41 cosponsors, and the list is growing.
It is hard to believe that members of Congress who put a "do not disturb" sign on the mortgage interest deduction could ever really be serious about reforming the federal income tax. If you cannot even bring yourself to restrict one of our largest tax breaks, especially when those getting the lion's share of the benefits are those least in need, where do you propose we cut? Or perhaps, Mr. Miller, you like the code the way it is?
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