Richard Green on the Mortgage Interest Deduction

Furthermore, even if you believe that some economic encouragement for people to own their own homes may be desirable, why is the MID extended to SECOND homes?

The latest advertisements continue to claim that home ownership is the cure of the world's ills. Actually it is the individual that makes a difference.

Our current housing debacle is made by people who bought homes they could not afford. Now they want the world to bail them out!

Is this they type of person who makes for a wonderful neighborhood? Is this the type of person who actively supports their children's education? Is this the type of person who cares about improving their community?

We really do need to take an axe to our tax code and get rid of so many of the deductions that no longer make any sense. We cannot legislate morality or wonderful neighbors through our tax code.

Yeah it's more about rewarding home ownership than supporting it.

Given that the income tax was created in 1913, it is hard to conceive of anything tax related which is not a "residual" of that law. Why make that point?

I never quite understood fully the "interest deduction causes more residential building" argument. First, on fairness alone, since individuals pay taxes on interest income, we should at least be able to deduct up to the amount of interest we receive against any interest we pay, mortgage related or not. Further, don't holders of mortgage debt pay taxes as do do holders of corporate debt?

But re: mortgage interest, if people do not buy housing they must presumably rent housing. Is anyone arguing that those who build rentable housing should not get the interest deduction that those who build "plant and equipment" do (as if plant and equipment ultimately do not result in a consumption item at the individual level)? That would strike me as a strange argument. Rental payments are simply "borrowed leverage". I assume the deductability of interest at the owner level in some way impacts the amount of rent charged. If this argument is incorrect, please advise.

Further, in an "alternative universe" one could easily imagine entrepreneurs creating 100 year leases on housing to replicate home ownership and interest deductions. The individual tax deduction on home ownership strikes me as a red herring as well as bad logic. We are better served in focusing on other ways the government has propped up housing----most specifically the Fannie and Freddie absurdity and other coercive or encouraged direction of capital toward housing.

Now that we have completely blown up the securitization market (after, naturally, artificially building it up), and appear to be turning banks into some kind of weird Frankensteinian "public utilty", we now are focusing on eliminating the interest deduction at the individual level. That sure will help.

Dodd-Frank is an unmitigated disaster, laden with "after the fact" criminalization abilities. To state the obvious, we have already lost money and capital in the 2008 debacle---big deal. No more bailouts, literal crony capitalism, and trying to fix yesterday's losses with absurd too big to fail arguments.

Were the tax code to support tax credits at 30%, rather than deduction, that would even out the benefit more towards the lower incomes.

Home ownership, by responsible people, is indeed good for the community and country and world. But renting by responsible people is also good -- responsible people are good.

And why subsidize just interest? If the goal is to subsidize home ownership, why not 30% or 20% tax credit on the whole payment? Part of the perversion of the MID was the strong encouragement to keep borrowing newly, to maximize the amount to deduct, within the affordability bounds.

In keeping the subsidy, there should also be a lifetime maximum, like 10 years of median tax payer wage (about $440 000), rising if the wage rises. Once that amount of subsidy benefit is obtained, per person, there will be no more. So Kerry or McCain with multiple houses would quickly max out and stop borrowing for the after-tax cheapness.

Of all gov't subsidies, the one for housing is perhaps the least bad for society. It's no wonder that it's a bigger target than slush funds for corporate friends like "green junk".