Since housing decisions tend to be rational, those of us who buy houses calculate the post-tax cost of our mortgage payments. The result is that we all realize that we can afford to pay more because of the home mortgage deduction. Since virtually all home owners take advantage of the mortgage deduction, the result of it is to push the cost of housing up. While this is a benefit to the construction industry and real estate agents, the result is a wash to consumers. Because the deduction reduces government revenue, the result is that tax rates need to be higher and renters are discriminated against. Eliminate the deduction.
Unfortunately, the deduction is virtually impossible to eliminate immediately. Too many of us have based calculations upon our knowledge that it exists. Without it, we could not afford our house payments. Furthermore, getting rid of it immediately will wipe out a good portion of our housing investment. To implement this proposal, we need to gradually phase out the deduction.
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I agree. Though I used to agree even more before I bought a house. I think, the phasing out would have to occur over at least 15 years. Idealy the government would keep the deduction at present level and announce a date - say 15 years from now - at which it drops to nothing. However, almost impossible to depend on Congress to stick with an idea that long under what would doubtlessly be intense lobbying pressure.
We all have our pet peeves about tax deductions. "Taxes should be nuetral and not be used to carry out a public policy." But having a tax without shifting income and affecting societal norms is like throwing a rock into a lake and not expecting a splash. The tax law has long been written to encourage or discourage things and in this case to encourage home ownership. It is one of the reasons we are the best housed nation on earth. Some group in congress with the power long ago decided that it was in our best interests to have a nation of home owners, so a tax incentive was created. It worked. To remove it now suggests that we no longer consider this to be good public policy for America. This tax deduction is built into our way of thinking and living.
There is a law I believe comes into play when we change things whose effects can ricochet through the economy and society. It is the law of unintended consequences. I think changing this particular rule would have unintended consequences, many of which we cannot forsee. I think most of these consequences would have a negative effect on our lifestyles.
Why not use tax law to alter behavior? It's a lot better than banning things outright. The mortgage deduction does not really disadvantage renters. As the choice between renting and buying is made, the relative costs of each need to be weighed. A reduction in the costs of ownership necessarily makes renting cost less to compete. Of course, what really happens is that the cost of housing goes up to compensate, and the rental market doesn't change much. At least this particular perturbation of equal taxation encourages a behavior that is likely in our national interest. Contrast this with the favorable tax treatment large SUVs receive.
Motgage deductions promotes and stimulates the building industry, thereby furthering a healthy economy.