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David Sirota
NationofChange / Op-Ed
Published: Friday 14 December 2012
The current law—which allows homeowners to deduct all interest on mortgages up to $1 million—is extremely expensive for the country costing roughly $100 billion a year, making it the third largest expenditure woven into the tax code.

Homeownership Support Shouldn’t Be a Mansion Subsidy

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With Congress finally starting to have a serious conversation about our revenue crisis, there are obvious reasons to limit the amount of mortgage interest that Americans can deduct from their taxable income.

First and foremost, current law - which allows homeowners to deduct all interest on mortgages up to $1 million — is extremely expensive for the country. As federal data show, it costs roughly $100 billion a year, making it the third largest expenditure woven into the tax code.

That huge outlay might be justified if the deduction was a widely-distributed, middle-class program. But with only about a third of all taxpayers earning enough to make it worthwhile to itemize their tax returns, just a quarter of all tax filers ever actually utilize the deduction. Add to this the fact that the deduction can be used for second homes, and the result is a write-off that mostly benefits the wealthy. In dollar-figure terms, it is a deduction that, according to the Tax Policy Center, saves $5460 for someone making more than $250,000 a year and only $91 for those making less than $40,000 a year.

As compelling as these facts are, though, the best argument for changing the deduction comes from recounting an obvious - but taboo — truth. Put simply, even in the name of the national goal of homeownership, the tax code does not need to subsidize $1 million mortgages, because nobody requires that large a mortgage to affford an adequate home.

The typical rejoinder to this truism is an argument citing disparities in real estate markets. The idea is that there are geographic variations in the price of decent housing, and that while a $1 million mortgage might buy a mansion in Omaha or Toledo, it supposedly doesn't buy enough in places like Manhattan and La Jolla. Therefore, the logic goes, the tax code should be fully subsidizing such outsized mortgages to make sure those living in posh enclaves aren't left out of the homeownership drive.

Yet, this facile reasoning ignores the difference between desire and necessity.

Sure, you may want to live on New York City's Upper West Side or Southern California's coastal bluffs, and if you have the cash to do so, go right ahead. However, you don't so desperately need to live there that taxpayers should be fully subsidizing your home loan.

This is true, by the way, even if your job is in one those expensive locales — after all, in nearly every major population center there are plenty of great homes that cost less than $1 million. They just require a bit more of a commute to the office. Again, you may not want that commute and if you are wealthy enough, you don't have to have one. But you don't needsomething more convenient than what less than $1 million can buy you in any real estate market - at least not to the point of justifying a tax loophole.

This is the basic — if unstated — principle behind a key initiative from President Obama's National Commission on Fiscal Responsibility and Reform. The bipartisan group proposes to limit the deduction to mortgage principal of $500,000 or less. Though some rich people will inevitably react to the concept with shrieks of "class warfare," the new write-off could be structured to still give them a deduction on the first half million dollars of their jumbo loans.

If America somehow believes such a commonsense initiative represents a class war and the proposal is consequently blocked in Congress, then it would mean there is no war at all. It would mean the rich have already won.

It would also mean there's little chance to solve our fiscal problems, because if such a modest proposal can be defeated, then even bigger budget reforms probably have no chance whatsoever.


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ABOUT David Sirota

David Sirota is a best-selling author of the new book "Back to Our Future: How the 1980s Explain the World We Live In Now." He hosts the morning show on AM760 in Colorado.

Don't worry about class

Don't worry about class warfare - the rich are winning

One major argument against

One major argument against your proposal is that the mortgage interest deduction contributes to the sale of residential real property. As a former Realtor I can state that this argument is, like so many other conservative points, a distortion of reality. To working families the deduction is very important in determining their ability to afford to purchase a home. However, once the consideration involves more up-scale properties, the interest deduction becomes nothing more than a bonus. A family considering the purchase of a $625,000 home ($500,000 mortgage amount) is not likely to reject such a purchse on the basis that the interest (or a portion thereof) may not be deductable. As a majority of second home and vacation home purchases are cash sales, the interest deduction is not a consideration. Therefore, limiting the mortgage interest deduction would appear to be a sound modification to the tax code and a source of additional revenue for Uncle Sam.

Hi David, two questions: 1)

Hi David, two questions:

1) You said the current deduction is costing us $100 billion per year. What would be the cost difference under your proposal?

2) Instead of limiting the size of the mortgage, why not just cap the deduction? For instance, a yearly maximum of $25,000 mortgage interest deduction per taxpayer. No matter if it is for a second home, or a home worth $1 million or $10 million. The maximum any taxpayer (or taxpayer household) can deduct for mortgage interest would be set, and the same for all. (That sounds less class-warfarey.)

The home mortgage deduction is problematic, but it is one of the few ways our economic system is rigged in a manner that actually does benefit members of the middle/working class.

Instead of belittling the deduction on the grounds that only a third of Americans benefit from it, we should all be working towards -- and rooting for -- an America in which MOST working people can afford their own home.

In other words, the opposite of Mitt Romney's proposed "solution" to the housing bubble bursting: he wanted to allow Americans to lose their homes while big companies snap up those properties for pennies on the dollar, then turn around and rent those homes back to the poor suckers who lost them. That may have been Mitt's American Dream, but for the rest of us, it is obviously a nightmare.

Progress is MORE Americans owning their own homes. The mortgage deduction is a critically necessary tool to get us there.

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