Is the Mortgage-Interest Deduction Really A Middle-Class Tax Break?

[Still a Democrat]

...
If we get rid of the mortgage-interest deduction, about 22 percent of people in the 40th through 60th income percentiles will pay higher taxes —on average $215 a year, or about half a percent of current after-tax income. For those in the 60th through 80th percentiles, only 45 percent would see their taxes go up—by an average $689, about 1 percent of after-tax income. While there are tax hikes, they’re fairly small in relative terms, and what’s more, less than half of people in these income groups would have to pay them. And below the 40th percentile, almost no one would be affected by repealing the mortgage-interest deduction.

The impact is more substantial farther up the earnings ladder. In the 90th through 95th percentiles, for example, 74 percent of people would see their taxes rise, costing them an additional $2,643 per year on average, about 1.75 percent of their after-tax income. It’s true that repealing the deduction would (in relative terms) have only a small impact on the top 1 percent of earners, but that’s largely because, as AaronW noted in the comments thread, “for the truly wealthy, mortgage debt is a much smaller proportion of their income than for middle income earners.”

From the numbers above, it’s clear that the benefit derived from the deduction is almost perfectly increasing with income. Low- and middle-earners are less likely to itemize their returns, which makes them unlikely to benefit from the mortgage-interest deduction. And because they make less money, they pay taxes in a lower bracket—meaning that every dollar in deductions reduces their tax bill by less than it would for someone in a higher bracket. Calling the mortgage-interest deduction a middle-class tax break essentially requires us to define someone in the 80th or 90th percentile of earnings as middle class. But they’re not; when you make more than 80 percent of the country, you’re rich, even if you don’t want to admit it.

...

http://www.tnr.com/blog/jonathan-cohn/79206/the-mortgage-interest-deduction-really-middle-class-tax-break

[Vincardog]

1. How about limiting them to the first 100K like SSI?

[louis-t]

2. Yeah, like that will happen.

[mike_c]

3. I'm all for eliminating the mortgage interest deduction....

First and foremost, I'm one of the substantial class of taxpayers who doesn't own a house or pay a mortgage to the bank, and for most of us, elimination of the mortgage interest deduction would have only positive consequences for the general budget, without any negative consequences personally. My view of the mortgage interest deduction has always been that it's a red herring used to encourage people to enter into long-term debt to bankers anyway. The savings are illusionary when viewed in context of all the interest one pays for the right to remain in crippling debt for thirty years or longer.

[Lance_Boyle]

5. Your rent will increase by the amount the owner can no longer deduct for mortgage interest paid.

Pyrrhic victory, for the burning win!

[WCGreen]

6. The mortgage for income producing property would not go away...

It would be considered a business expense and that would, I am almost 100% sure, stay available...

[leftofcool]

8. Let us hope so............

We have a small condo rented out, usually stays rented and for the last 8 years, we have yet to see any income from it. Our only real advantage to keeping it and renting it out is the mortgage interest deduction.

[lumberjack_jeff]

11. Interest on a loan for a rental is a business expense.

It'd still be deductible.

[mike_c]

13. nah, my house has been owned free and clear for years....

And I don't buy that argument-- rents in my neighborhood have been pretty steady for years, despite wildly varying home values and prices as the real estate bubble came and went. I've lived in this house for over ten years, and my rent has increased only once-- from an awesomely excellent deal to a merely great deal. Seriously-- at the heart of the housing bubble, I'd have had to pay well over $2K in monthly mortgage payments if I had bought the house I rent, plus the costs of maintenance, insurance, taxes, etc. I'm confident that's the case because several of my neighbors report being in precisely that situation. My rent, on the other hand, was only $750/month at the time and has gone up now to $900/month, for a very nice, comfortable house in a great rural small-town on California's north coast. That difference in housing cost gives me a much improved quality of life. Even if my rent did go up a little, it would be worth it to me. But I can't see rents in this community going up too much.

[racaulk]

14. That's assuming mike_c rents from an individual taxpayer.

A room in someone's home, for example. The home mortgage interest deduction is purely an itemized deduction that is allowed for individuals to claim on their 1040 (Schedule A, to be exact).

If he is renting from a corporate taxpayer (think "apartment complex"), then the company will simply continue to take an interest expense deduction against their ordinary income. The home mortgage interest deduction has no bearing on corporate income, so if his rent increases, it is not due to that reason in this case.

[lumberjack_jeff]

17. Rental is a business, corporation or no.

Sole proprietors can write off business expenses on their personal income tax.

The portion of your house which is rented out is a business.

[taught_me_patience]

20. Not true

Rent is a factor of supply and demand in a market. Land owners are price takers in that market.

Rental price is not a "cost plus".

[leftofcool]

4. It sure helps us and we are not even close to the upper percentile

We save about 400 a year in taxes with an income of 100K per year. It doesn't sound like much but it often means the difference in paying more when filing or getting a bit back. We need all the tax breaks we can get and every little bit helps us.

[WCGreen]

7. I think mortgage rates would drift slightly down because the

availability of the deduction is considered part of the transaction between the lender and the borrower.

[gratuitous]

9. Deduction of mortgage interest could stand some fine-tuning

I don't know that interest deductibility is the make-or-break decision point for anyone looking to buy a home. It's a nice perk come tax time, but it doesn't affect a person's day-to-day existence over the course of the year. Perhaps if the deduction was limited to just one property per return? Ordinary folks would still get the full benefit of the deduction, but persons paying mortgages on two, three or more houses, either for personal use or as rental income properties, wouldn't get the deduction except for one house, presumably the one with the highest mortgage.

This could have the unintended consequence of raising monthly rents, though it probably wouldn't be a substantial amount per month, unless a landlord was a real son of a snake, and used it as justification for really jacking up rents. But that is one area where free market rules might enforce conformity, where a landlord who raised rents substantially would have difficulty finding people to rent their properties.

Lots of angles to consider, but a review of this tax policy might be a good thing even if nothing happens.

[lumberjack_jeff]

10. Don't conflate middle income with middle class.

Middle-class is an arbitrary set of the wanna-be rich, who refuse to identify themselves with the working class.

[lumberjack_jeff]

12. Get rid of the mortgage deduction.

Raise the standard deduction until it's revenue neutral.

[Still a Democrat]

16. I'd buy that n/t

[hfojvt]

15. no, it isn't

but it seems to be popular with the high income liberals here.

Go figure.

[harun]

18. It encourages a culture of debt and rewards those who go in to debt.

Also encourages one to stay in debt.

They can reduce income taxes on those needing this tax break, but should get rid of the interest deduction.

[pa28]

19. He calls the deduction "inexpensive" and I think he was unintentionally right.

What is actually expensive is the tax trade off this deduction curtailment is being linked to in the Simpson-Bowles report.

President Obama will soon unveil a new tax framework that "broadens the base" and flattens tax rates. The loss in revenue will have to be paid for by limiting deductions like this one. The people who benefit most from these deductions will see modestly lower taxes while the very richest would see their tax rate drop the mid 20%'s.

Using the chart provided by the author the top will see around 5k less without the mortgage deduction but they won't care because they'll get an additional 100k or more through the tax cut. He seems to be making the case that the very richest benefit most through this deduction but the best example he could seem to find was the 90th percentile. As people get wealthier they have less debt and own their property outright so as the income in that chart increased the relative portion of benefit to income decreased. He seems to think the threshold for rich people begins at about 100k per year. For a family earning this much who might have taken a big hit to their savings and could well be underwater on their house the last thing they need is to have their own deductions trimmed away in order to subsidize a huge tax cut for the rich.

I'm sure we'll hear plenty more about the evils of deductions (or loopholes their now being called) in the coming weeks. Unfortunately the Simpson-Bowles "report" which is now the favored White House template for deficit reduction only worsens the trend of upwards wealth re-distribution. Talking about eliminating or cutting back on deductions and credits that mostly benefit middle and low end earners and finding ways to make these acceptable or less painful is really the wrong conversation. Reversing the regressive trends that are killing off the middle class is what we should be doing but for the "very serious people" in Washington the idea of taxing the rich is unthinkable.