France’s Highest Court Strikes Down Mortgage Interest Deduction

August 20, 2007

The highest court of France, the Constitutional Council, last week upheld most parts of President Nicolas Sarkozy’s first round of tax reductions in a challenge brought by opposition Socialist Party leaders. One provision that did not survive was a proposed mortgage interest deduction.

The deduction would have allowed French homeowners to deduct their mortgage interest payments for the first 5 years of a mortgage on a principal residence, with a maximum benefit of €3,750 (about $5,050) for a single person and €7,500 for a couple (about $10,100). The deduction would have been available to all homeowners, including for homes purchased before the law took effect.

The Council ruled (French) that because the law’s stated purpose was to help people who are not yet homeowners by providing an incentive to buy, giving the deduction to existing homeowners, and extending it indefinitely into the future, was a “disproportionate tax advantage compared to its objective,” in violation of the French Constitution.

Other provisions that survived challenge include eliminating income taxes on overtime work, reducing the top marginal tax rate, and exempting small business investments from France’s 1 percent wealth tax. Interestingly, the Council cited the French Constitution’s “right to obtain employment” section to uphold the easing of restrictions on working overtime.

We’ve written here and here about problems with the home mortgage interest deduction in the U.S., which will cost $90 billion in 2008 (compared to the French proposal, which was only about half that, adjusting for population). Despite its purported objective of increasing home ownership, all it really does is increase home prices.

And we’ve previously noted that like France, virtually every other OECD country is lowering tax burdens, but the U.S. is lagging behind.

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