Thursday, September 13, 2012
Letting homeowners deduct interest paid on their mortgages from taxable income makes no sense. It encourages taking on more debt, discriminates against renters, subsidizes one kind of spending over others and favors the upper incomes. It advances the questionable public goal of making more Americans into homeowners. And it costs the Treasury about $100 billion a year.
Although the mortgage-interest deduction is bad policy on numerous fronts, neither party seems keen to take it on. The real-estate industry portrays any cross-eyed look at the loophole as a frontal assault on the American Dream.
To their credit, Republicans baby-stepped in the right direction by trying to drop their usual support for the mortgage-interest deduction from their party platform. Candidate Mitt Romney has called for revenue-neutral tax reform that would lower federal income-tax rates while getting rid of loopholes -- what is called "broadening the tax base." (He refuses to be specific on which ones he'd close.) By leaving out mention of the mortgage deduction, the platform would push the message along.
No sooner was that thought on paper than the real-estate industry went to work on the Republican Party. In its place was put a pledge to protect the mortgage deduction if tax reform doesn't happen. Still, progress.
Why offer a tax break for buying one product and few others? If you take out an auto loan, the interest you pay cannot be deducted from taxable income. If you buy a sofa on the installment plan, same no-deal. If you charge airline tickets on your credit card, again, the interest on your unpaid balance is not deductible.
The social-policy argument for the mortgage deduction is that it helps Americans buy homes, and that homeownership stabilizes communities. The first part is debatable. Canada does not allow for a mortgage-interest deduction, and its rate of homeowning matches ours.
What we see here is social engineering gone haywire. The federal government should not care whether you buy or rent your residence. Because lower-income people are more likely to rent, they are left out. Because higher-income people are more likely to have bigger houses with bigger mortgages, they benefit disproportionately. Meanwhile, the deduction is useless to those who don't itemize, which is most taxpayers.
This incentive to buy real estate helped inflate the housing bubble. Sold as a tax haven, the deduction propelled ordinary folks to take out bigger mortgages than they should have. And their ability to borrow more let them bid up house prices to absurd levels. When the bubble splattered, and house prices plunged, many buyers found themselves owing more on their home than the place was worth. How stable is a neighborhood full of foreclosed properties?
Here is a plan for getting rid of the mortgage-interest deduction. It would harm neither the currently fragile housing market nor the political career of any candidate with a modicum of guts:
Phase out the deduction very gradually. If house shoppers know that a full deduction for mortgage interest is available for only a few years, that might boost house sales now. There's already a $1.1 million ceiling on the size of mortgages whose interest can be deducted. Over time, further limit the deduction's value.
The housing industry will undoubtedly go through the roof, hollering that war has been declared on a rare (and much exaggerated) middle-class tax benefit. But closing this loophole could win wider backing if most mortgage holders are convinced that the value of the deduction they are losing would be offset by lower income-tax rates. You never know. Some day our political leadership may summon the courage to do the rational thing and treat real estate like any other possession.
COPYRIGHT 2012 THE PROVIDENCE JOURNAL CO.
DISTRIBUTED BY CREATORS.COM
See Other Political Commentary.
See Other Commentaries by Froma Harrop.
Views expressed in this column are those of the author, not those of Rasmussen Reports. Comments about this content should be directed to the author or syndicate.
Rasmussen Reports is a media company specializing in the collection, publication and distribution of public opinion information.
We conduct public opinion polls on a variety of topics to inform our audience on events in the news and other topics of interest. To ensure editorial control and independence, we pay for the polls ourselves and generate revenue through the sale of subscriptions, sponsorships, and advertising. Nightly polling on politics, business and lifestyle topics provides the content to update the Rasmussen Reports web site many times each day. If it's in the news, it's in our polls. Additionally, the data drives a daily update newsletter, the Rasmussen Report on radio and other media outlets.
Some information, including the Rasmussen Reports daily Presidential Tracking Poll and commentaries are available for free to the general public. Subscriptions are available for $3.95 a month or 34.95 a year that provide subscribers with exclusive access to more than 20 stories per week on Election 2012, consumer confidence, and issues that affect us all. For those who are really into the numbers, Platinum Members can review demographic crosstabs and a full history of our data.