While wildly popular, the mortgage tax deduction is one of the more obvious forms of regressive tax policy in the country.
The mortgage interest tax deduction taken advantage by American homeowners is wildly popular and people cringe when they think it might be eliminated. One attack against Governor Romney is that he would eliminate the mortgage deduction should he be elected to help pay for across the board tax cuts. Maybe we shouldn’t be so afraid.
I don’t support reducing the tax burden unevenly for the wealthy in this country. I believe strongly in a progressive tax system that increases the tax burden as you move up the income ladder. Our income tax system for instance is progressive, as are property taxes. The mortgage deduction on the other hand is a regressive tax deduction.
What this means is that the more money you take out on a house, the more you get to deduct. Because of this, persons who make more money have a greater claim to benefits. The result is unevenly reducing the tax burden on the upper income levels. This increases our inequality and ultimately slows economic growth.
Many middle-class individuals benefit from this tax credit directly, however, I would argue end up needing to pay additional taxes in the long-run as a result (through increased income taxes for instance). The overall effect is an increase in the tax burden on those who have less claim by necessity to balance the government budget in the long-run.
The policy also directly affects those at the lower rungs of the income ladder, those renters who are unable to claim this credit. The whole system just isn’t fair. The mortgage tax credit will cost the government $1.4 trillion dollars over the next decade. This is a lot of money, that if directed towards jobs programs, direct payments, or fair and sensible tax cuts would improve our economic performance.
(Besides the fairness, also check out why we need to reduce our dependency on the housing market)
The amount of lost revenue to the government is equal to roughly $1,200 per full-time worker. Giving each worker money this way benefits the majority, renters as well as homeowners in the middle-class. The middle American benefits roughly $215 from the mortgage interest deduction… for those in the top 1% this swells to $5,393. As you see, the only people hurt from this on a large-scale are those who don’t need the extra help – those who are unfairly subsidizing this credit would gain hundreds of additional dollars from this credit.
It appears that the majority of Americans do favor some kind of reform, according to the National Low Income Housing Coalition (NLIH) 63% believe tax deductions should only apply to mortgages $500,000 or less and 59% support helping low-income families pay their rent. I think we are on the right track, but we can do better than a deduction attached to property. When you subsidize the housing and banking industry by providing for an interest deduction you are artificially increasing the price of homes, meaning less can buy them – a capitalist would call this a market distortion. This distortion is sometimes referred to as “the hidden welfare state” benefiting individuals with large disposable incomes. A better plan is to just cut a check to each family or provide for a straight through tax credit.
In short, the deduction unfairly benefits the rich and costs us a lot of money that could be distributed more equitably in the economy. It is unfair, immoral, and goes against the capitalistic framework of our country.