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David Sirota
David Sirota
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Homeownership Support Shouldn't Be a Mansion Subsidy

Comment

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. 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 afford 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 need something 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.

David Sirota is a best-selling author of the book "Back to Our Future: How the 1980s Explain the World We Live In Now." He co-hosts "The Rundown" on AM630 KHOW in Colorado. Email him at ds@davidsirota.com, follow him on Twitter @davidsirota or visit his website at www.davidsirota.com.

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Comments

6 Comments | Post Comment
I am sick of class warfare, but this dosen't seem that bad to me. For starters, I am all for eliminating loopholes and simplfying the tax code. In general homeowners are richer than renters so it does seem that this loophole gives money from lower earners to higher ones. I am ok with what David is proposing. Many middle class families would be hurt by closing this loophole for good and I am all for people keeping their money. Government dosen't have a divine right to it. Keep up the good work.
Comment: #1
Posted by: Chris McCoy
Fri Dec 14, 2012 6:27 AM
I am sick of class warfare, but this dosen't seem that bad to me. For starters, I am all for eliminating loopholes and simplfying the tax code. In general homeowners are richer than renters so it does seem that this loophole gives money from lower earners to higher ones. I am ok with what David is proposing. Many middle class families would be hurt by closing this loophole for good and I am all for people keeping their money. Government dosen't have a divine right to it. Keep up the good work.
Comment: #2
Posted by: Chris McCoy
Fri Dec 14, 2012 6:28 AM
Anyone who is "sick of class warfare" must be in the class that's winning (or think they are).

I totally agree with this proposition. I do see value in encouraging home-ownership and making it easier for lower and middle class Americans to afford a home if that is what they want, so the deduction should not be eliminated entirely. Paying rent, while sometimes convenient, is just allowing rich landlords to get even richer while home ownership allows lower-income Americans to build up equity over a long period of time that they might not otherwise be able to save from their salaries.

But the thing that gets me is that whenever anyone talks about the mortgage deduction, they always talk about it in relation to the middle class. This is the first article I've read that points out the obvious -- that the super-wealthy should be qualified for the deduction and that this is just one more way the rich are avoiding paying their fair share of taxes. There should be a lower cap so that the rich can't abuse our taxpayer subsidy and so it doesn't continue to encourage McMansions and purchase of multiple homes. It also leads to a sort of arms race in some areas which drives up home prices and makes home ownership unaffordable for many Americans.
Comment: #3
Posted by: A Smith
Fri Dec 14, 2012 10:44 AM
Actually Smith, I am in the middle class and in no way am affected by rich people tax hikes. I am sick of the class warfare because it distracts us from the real problem and causes a gridlock in Washington. Taxing the rich isen't going to solve our problems, so they either need to pass the tax hikes, or table them for good. Dosen't matter to me, I just want washington to focus on the real issues at hand.
Comment: #4
Posted by: Chris McCoy
Mon Dec 17, 2012 6:22 AM
Chris,

I strongly, but respectfully, disagree with you. Economic inequality is at the root of many of our problems and reversing this inequality by pointing out (what should be obvious) that the rich have been waging war against the rest of us is far from a distraction -- in fact, it is a necessity. It has been the rich getting richer off the backs of the middle class over the past 40 years that has allowed the plutocrats to buy and capture Washington, leading directly to the gridlock you disdain. Think about it... who does the gridlock benefit? Not us! But if you are rich or a corporation that wants to do whatever it likes without restriction, then you don't want our government stopping you. Have you ever noticed that bad things seem to sail through Congress without any delay but the bills that would help the vast majority of Americans are thwarted time after time? That "gridlock" is intentional and is caused by the rich buying off our representatives. The rich are also using the "starve the beast" strategy to force the dismantlement of our social safety net by driving up the debt through ever lower tax cuts and increasing military spending (look no further than the current so-called "fiscal cliff" debate to see this in action). This strategy came from the "Two Santa Clauses" Theory. I suggest you look it up.

But you are correct in that taxing the rich is only part of the solution and won't magically solve all of our problems overnight (but it will help greatly further the cause). We also need to stop the rich from buying elections. We need campaign finance reform and we need a constitutional amendment saying that corporations are not flesh-and-blood and so are independent of the speech rights that the rest of us humans enjoy.

It's a constant feedback loop: the rich get richer by getting tax cuts, then they use that money to buy more of our government to get more tax cuts so they can buy more government. We need to break the cycle so Washington will start to focus on the real issues at hand! So I say "soak the rich!" They started the war. Let's finish it. War on.
Comment: #5
Posted by: A Smith
Tue Dec 18, 2012 11:37 AM
Yes the weath gap has been increasing, but income redistrubution only makes it wider. You don't realize it, but you are running the ball towards the enemies goal posts. More rules and regulations only secure the big corperations, while making smaller mom and pop shops unable to comply with the stringant rules. We both want the same thing, but I propose a free market, less government approach. You are proposing that the same people that you admit are in bed with the rich, should fix the problem. Good plan. And its been working out so well over the past 10 years.
Comment: #6
Posted by: Chris McCoy
Wed Dec 19, 2012 6:36 AM
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