I promised you that we’d discuss the six policies economists love but politicians hate  and this week we’ll talk about the first one – Eliminate the mortgage tax deduction. This is what the NPR story said:
Eliminate the mortgage tax deduction, which lets homeowners deduct the interest they pay on their mortgages. Gone. After all, big houses get bigger tax breaks, driving up prices for everyone. Why distort the housing market and subsidize people buying expensive houses?
I agree and here are my three reasons why.
First, the mortgage deduction  is not as much as most people believe it to be. Remember that we each get a standard deduction, $5950 for single and $11900 for married filing jointly, that we are able to claim without paying a penny. So if you were to pay $5950 in mortgage interest as a single filer, you get no benefit from the deduction. Pay $6000 in interest and you get an extra $50 off your taxable income – but you paid $6000 in interest… so you’re still behind. I think you get the idea.
Second, how many people consider the deduction when buying a home? You probably look at your income and try to qualify for a loan. How many buyers adjust their withholding after they buy a house because they know they will claim the deduction? Very few. It’s not part of the decision, the deduction results in a tax break which results in a tax refund the following year. That money is then parsed out to whatever the existing needs are.
Lastly, the deduction is a government subsidy that increases the price of homes. Just as how the Fed’s quantitative easing and loose monetary policy has resulted in lower interest rates (another subsidy that lowers home prices by lowering interest rates), the deduction is fiscal policy that boosts up home prices and rents.
What do you think?
(Photo: wwworks )