Costing $100 billion a year while the fiscal 2013 U.S. deficit ran $680 billion, the mortgage interest tax deduction remains a sacred cow, although less than 20 percent of American taxpayers use it. With the housing market on the rebound, it’s time for Washington policy makers to consider tightening this tax loophole.
Contrary to popular belief the mortgage interest tax deduction was never introduced to encourage home ownership. It came in with the income tax in 1913 as a deduction on all interest. Back then we were a nation of renters. Most mortgages were short term, five to seven years, with down payments of 50 percent. As part of the New Deal in 1934, the Federal Housing Administration (FHA) introduced the 15 year home loan with a small percentage down, changing the look of the mortgage market in the U.S. forever. With the return of WWII veterans in the mid ’40s, the housing market soared.
President Reagan’s Tax Reform Act of 1986 eliminated many tax deductions for interest including those for credit cards, but it increased the mortgage interest tax deduction for home owners. In general, you can write off $1,000,000 worth of home acquisition debt on your primary and secondary residences, and $100,000 of home equity debt. The mortgage interest tax deduction was a factor in increasing home ownership in the United States to a peak of 69.2 percent in 2004, although it’s expected to dip below 65 percent this year.
The reason that not every home owner takes advantage of this deduction is that many home owners do not itemize. For them, the standard deduction is bigger. Richer Americans tend to itemize more. According to the Center on Budget and Priority Policies, 77 percent of the benefits from the mortgage interest deduction went to home owners with incomes of over $100,000 while nearly half of home owners with mortgages got no break from the deduction.
Income inequality is finally being recognized as a serious problem in the United States. According to Pew Research, it is now at its highest point since 1928, the peak of the roaring ’20s.
Today, the top 1 percent of Americans gets nearly 22.5 percent of all pre-tax income in the country, while the bottom 90 percent now gets less than half. Do we really need to keep another tax policy in place that favors the wealthy?
Does the mortgage interest deduction encourage home ownership?
If you look at countries around the world where the majority of the residents live in their own homes, in many nations mortgage interest is not tax deductible including South Korea, France, Poland, and Japan. New Zealand, Britain, Canada, and Australia all have higher percentages of home ownership than the U.S. and mortgage interest is not deductible. The country with the highest percentage of home ownership in the world, Singapore at 87.2 percent, does not allow mortgagors to deduct home loan interest.
Alan D. Viard of the conservative American Enterprise Institute recognizes that the current system unfairly benefits the wealthy. Like the Center of Budget and Policy Priorities, he suggests replacing the deduction with a tax credit because its effect would be felt more widely across income groups.
President Obama’s 2010 and 2011 budget had proposals limiting mortgage interest deductions for the wealthy. They went nowhere. All limits on the mortgage interest tax deduction are opposed by the National Association of Home Builders and the real estate lobby, which pumped $80 million into 2012 Congressional campaigns. In this election year, expect no change.
Just remember Ray Egan’s and Gus Kahn’s lyrics from the roaring ’20s song, “Ain’t We Got Fun?” — “The rich get richer and the poor get children.”
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