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Trophy-House Mortgage Interest Deduction

2 min readBy: Andrew Chamberlain

An excellent op-ed from this Sunday’s Seattle Times unleashes a terrific and well-deserved salvo against the home mortgage interest deductionThe mortgage interest deduction is an itemized deduction for interest paid on home mortgages. It reduces households’ taxable incomes and, consequently, their total taxes paid. The Tax Cuts and Jobs Act (TCJA) reduced the amount of principal and limited the types of loans that qualify for the deduction. . From the piece:

The mortgage-interest deduction is bad economic policy. It encourages consumption, rather than saving. People take out big mortgages to free up spending money. (A little devil tells them not to worry about all the borrowing because the interest on the loan can be taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. -deductible.) An unhealthy economic incentive, the deduction is also expensive. It cost the Treasury $63 billion last year in needed revenues. The entire budget of the U.S. Department of Housing and Urban Development was $35 billion.

The deduction is bad social policy. It discriminates against renters, and even homeowners of moderate means.

“The people who have the biggest homes, who make the most money are the greatest beneficiaries of this tax subsidy,” says Nicolas Retsinas, director of the Joint Center for Housing Studies at Harvard University. “If you rent, you don’t get the deduction. Even if you own a home and have a modest income, you’re likely to take a standard deductionThe standard deduction reduces a taxpayer’s taxable income by a set amount determined by the government. It was nearly doubled for all classes of filers by the 2017 Tax Cuts and Jobs Act (TCJA) as an incentive for taxpayers not to itemize deductions when filing their federal income taxes. , which means you don’t get it.”

The mortgage-interest deduction is a boulder in the stream of tax reform. A lot of people say they want a “flat taxAn income tax is referred to as a “flat tax” when all taxable income is subject to the same tax rate, regardless of income level or assets. ” — a single rate for all incomes, with no deductions, exemptions or loopholes allowed. A flat tax could cure the annual migraine of filling out IRS forms. But there can be no honest flat tax that makes an exception for a break that benefits the well-to-do…

Reagan was right on this one. And so is Bush’s tax advisory commission. Is there a brave political soul out there looking for a good policy?

Agreed on all counts—including the author’s pessimism that lawmakers will substantially reform the home mortgage interest deduction given pressure from realtors and home builders to preserve it. Read the full piece here.