There are easier ways to reduce one’s tax bill. But for many American taxpayers, this is the big one: the deduction for interest payments on home mortgages.
Homeowners in the U.S. last year received a total of roughly $70 billion in federal tax breaks through the deduction. But discussions in Congress about a broad tax overhaul are heating up, and all sorts of tax deductions — including the mortgage-interest deduction — are being discussed by both parties.
Supporters of the mortgage-interest deduction say it encourages homeownership and gives the middle class a better shot at financial security. The deduction helps middle-income purchasers by making their mortgage payments more affordable and by helping these families build equity in their homes.
But critics say the deduction mainly benefits those with higher incomes. They say that it does nothing to help lower-income Americans who rent. In addition, they argue, in these tough budgetary times the government could put the forgone tax revenue to good use.
So far, much of the discussion about changing the mortgage-interest deduction has focused on reducing its benefits for the wealthiest Americans. President Barack Obama has supported clipping the deduction for taxpayers in the top two tax brackets.
More recently, Rep. Dave Camp, a Michigan Republican, proposed a tax-overhaul that would, among other things, lower the limit on home mortgages that qualify for the deductions to $500,000 of principal from the current $1 million.
Arguing to keep the deduction in its current form is John C. Weicher, director of the Center for Housing and Financial Markets at the Hudson Institute. Bruce Katz, vice president and director of the Metropolitan Policy Program at the Brookings Institution, argues that the deduction needs to be revamped or replaced.
Yes: The policy mainly benefits those who need the help least
By Bruce Katz
The mortgage-interest deduction is a waste of valuable government resources at a time of intense budget pressures in Washington.
As a policy, this $70 billion-a-year tax break doesn’t achieve one of its most-touted goals, which is to increase homeownership. Further, by prioritizing subsidies for economic consumption, it actually represents almost the exact opposite of what the government should be doing, which is investing in a more sustainable and productive economic future.
Other countries have achieved comparable rates of homeownership without similar tax deductions: 69% in Canada and 64% in Britain, compared with 65% in the U.S. A small portion of U.K. homeowners have benefited from the sale of government-assisted housing, but the fact remains that the U.S. homeownership rate is comparable to countries that don’t provide broad tax incentives for homeownership.
Well-to-do
The deduction here in the U.S. doesn’t even help most taxpayers. It mostly benefits the well-to-do. Less than one-third of taxpayers are able to take advantage of the deduction — it is restricted to those who itemize their deductions, a group that skews toward the upper end of the income distribution. Also, the benefit is tied to the marginal tax rate of the taxpayer and so has higher value to those with higher income. For households making above $200,000 a year, the average benefit is $1,784 a year in tax savings. For households earning $65,000 a year, the deduction generally yields less than $200 in tax savings.
The fact that home equity represents a greater share of household wealth for the middle class than for those with higher incomes does not negate the fact that the value of the deduction accrues disproportionately to upper-income households. According to the Congressional Budget Office, households in the top quintile of income (earning more than $160,000 a year) receive 75% of the total reduction in taxes. These households are already most likely to own a home.
Some experts dispute the CBO analysis, claiming that the deduction is not as regressive, but their analyses rely exclusively on IRS return data, which excludes non-tax-filers. CBO data account for these non-filers — who tend to be lower-income — and, as a result, paint a more accurate picture of the distribution of the benefits.
Simply put, the bulk of the mortgage interest deduction is wasted on those who do not need government assistance to purchase a home.
The middle class would be much better served by a mortgage tax incentive with a more equitable distribution, or by alternative expenditures that boost the number of middle-class wage earners able to purchase a home. The government could help foster universal pre-K education, addressing America’s declining economic mobility and educational achievement gap. It could spur innovation, create jobs and invest in basic science by making the tax credit for corporate research and development permanent. It could invest in state-of-the art infrastructure, again helping to make the U.S. more competitive.
Policies like these can help the U.S. regain its position as a global leader in advanced industries — and help the middle class at the same time. These policies address the structural problems with our economy, such as trade deficits, wage stagnation and growing inequality. Fixing those problems will lead to increased home building and homeownership — not the other way around.
Tax reform
The good news is reform of the mortgage deduction is no longer the “third rail” of federal policy. President Obama and leading congressional Republicans (including Rep. Dave Camp, chairman of the House Ways and Means Committee) have proposed limiting the value of individual deductions including the mortgage deduction. It appears likely that some kind of reform will be part of any broader federal budget and tax deal.
Reform of the mortgage interest deduction is essential if the U.S. is going to have a tax code that builds a strong and resilient middle class and a housing policy that encourages homeownership in a fiscally efficient and effective manner.
The U.S. faces a clear trade-off in the aftermath of the Great Recession: continue to subsidize bigger homes on bigger lots or make the kinds of smart investments in innovation, infrastructure and education that will lead to a more productive and inclusive national economy. Will we make the right choice?
We worry about growing inequality and the dwindling middle class, and advocate various policies to reverse these trends. And yet at the same time, we talk about reducing or eliminating the tax deduction that does the most to promote a more equal distribution of economic well-being.
The mortgage-interest deduction is not a tax dodge for the rich. It is exactly what its staunchest advocates say it is: a financial incentive that helps millions of Americans achieve greater financial security through homeownership.
It’s misleading to compare U.S. homeownership rates with those of Canada and Britain. While neither has a mortgage-interest deduction, the U.K. has a program to sell public housing to residents on very favorable terms. Canadian taxpayers, meanwhile, can get a deduction for mortgage principal payments and a very generous tax break to help with down payments.
Define ‘wealthy’
Still, many criticize the U.S. deduction as a benefit mainly for the wealthy. To make this charge stick, they use a somewhat sliding scale to define “wealthy.” During the 2012 campaign, President Barack Obama called for raising taxes on “millionaires and billionaires,” although at the same time his budget proposed to raise taxes for married couples with incomes over $250,000.
But only about 60% of taxpayers with adjusted gross incomes of $250,000 or more claimed the deduction in 2011, and their deductions added up to roughly $45 billion — less than 12% of the $364 billion deducted nationally. Taxpayers with adjusted gross incomes of $1 million or more deducted only $5 billion, less than 2% of the total.
Some use a broader brush to depict the deduction as unfair. Instead of talking about “the wealthy,” however defined, they complain that the deduction mainly benefits those with upper incomes. There is a bit of truth to this. In 2011, for example, the 40% of all households with incomes above roughly $65,000 did receive about 75% of the total mortgage deduction.
But when you consider that this same group also paid more than 90% of all income taxes and received more than 85% of the deduction for state and local taxes, does it seem unfair, or even surprising, that it also receives most of the benefit from the mortgage-interest deduction?
A 2013 Congressional Budget Office study claims that just the top quintile gets 75% of the deduction’s benefit. But that was a forecast using 2006 data. My calculations use 2011 IRS data. I look only at tax filers, but that’s just about everybody (145 million tax filers, 114 million households in the U.S.). Since 2006, the top quintile’s share has increased (to 64% from 59%) as the total of deductions claimed has shrunk. But this isn’t due to unfairness in the mortgage deduction. It’s because those defaulting on their mortgages and losing their homes aren’t in the top quintile.
The deduction does benefit homeowners only, so to qualify one must have a certain income to start with. But more important, the benefits don’t increase as one moves up the income scale. The opposite is true. For individuals, the deduction matters more at the lower levels of the ladder.
Equity magnified
Consider, when your income is $65,000 a year, home equity tends to be a much bigger portion of your personal wealth than when your income is $650,000. Higher-earning homeowners tend to have large investment portfolios as well. And the more diverse their holdings are, the less important their homes are to their overall portfolio.
The Federal Reserve Board has reported that at least since 1992 homeowner equity has made up 20% to 25% of total U.S. household wealth. Stocks and mutual funds together also make up roughly 20% to 25%. Another share of roughly equal size is made up of unincorporated and closely held businesses, including proprietorships, partnerships and professional practices.
The importance of each type of asset to individual households, however, varies immensely depending on the level of household income. Among the top 10%, stocks and businesses account for 60% of their wealth; home equity, about 15%.
The middle class — those with incomes between $35,000 and $65,000 — has a very different portfolio. Home equity exceeds one-third of their assets, bigger than stocks and businesses combined.
The deduction helps families move into the middle class and live in comfort during their retirement years. It is about the only provision of the tax code that does. It’s worth keeping. WSG
There are easier ways to reduce one’s tax bill. But for many American taxpayers, this is the big one: the deduction for interest payments on home mortgages.
Homeowners in the U.S. last year received a total of roughly $70 billion in federal tax breaks through the deduction. But discussions in Congress about a broad tax overhaul are heating up, and all sorts of tax deductions — including the mortgage-interest deduction — are being discussed by both parties.
Supporters of the mortgage-interest deduction say it encourages homeownership and gives the middle class a better shot at financial security. The deduction helps middle-income purchasers by making their mortgage payments more affordable and by helping these families build equity in their homes.
But critics say the deduction mainly benefits those with higher incomes. They say that it does nothing to help lower-income Americans who rent. In addition, they argue, in these tough budgetary times the government could put the forgone tax revenue to good use.
So far, much of the discussion about changing the mortgage-interest deduction has focused on reducing its benefits for the wealthiest Americans. President Barack Obama has supported clipping the deduction for taxpayers in the top two tax brackets.
More recently, Rep. Dave Camp, a Michigan Republican, proposed a tax-overhaul that would, among other things, lower the limit on home mortgages that qualify for the deductions to $500,000 of principal from the current $1 million.
Arguing to keep the deduction in its current form is John C. Weicher, director of the Center for Housing and Financial Markets at the Hudson Institute. Bruce Katz, vice president and director of the Metropolitan Policy Program at the Brookings Institution, argues that the deduction needs to be revamped or replaced.
Yes: The policy mainly benefits those who need the help least
By Bruce Katz
The mortgage-interest deduction is a waste of valuable government resources at a time of intense budget pressures in Washington.
As a policy, this $70 billion-a-year tax break doesn’t achieve one of its most-touted goals, which is to increase homeownership. Further, by prioritizing subsidies for economic consumption, it actually represents almost the exact opposite of what the government should be doing, which is investing in a more sustainable and productive economic future.
Other countries have achieved comparable rates of homeownership without similar tax deductions: 69% in Canada and 64% in Britain, compared with 65% in the U.S. A small portion of U.K. homeowners have benefited from the sale of government-assisted housing, but the fact remains that the U.S. homeownership rate is comparable to countries that don’t provide broad tax incentives for homeownership.
Well-to-do
The deduction here in the U.S. doesn’t even help most taxpayers. It mostly benefits the well-to-do. Less than one-third of taxpayers are able to take advantage of the deduction — it is restricted to those who itemize their deductions, a group that skews toward the upper end of the income distribution. Also, the benefit is tied to the marginal tax rate of the taxpayer and so has higher value to those with higher income. For households making above $200,000 a year, the average benefit is $1,784 a year in tax savings. For households earning $65,000 a year, the deduction generally yields less than $200 in tax savings.
The fact that home equity represents a greater share of household wealth for the middle class than for those with higher incomes does not negate the fact that the value of the deduction accrues disproportionately to upper-income households. According to the Congressional Budget Office, households in the top quintile of income (earning more than $160,000 a year) receive 75% of the total reduction in taxes. These households are already most likely to own a home.
Some experts dispute the CBO analysis, claiming that the deduction is not as regressive, but their analyses rely exclusively on IRS return data, which excludes non-tax-filers. CBO data account for these non-filers — who tend to be lower-income — and, as a result, paint a more accurate picture of the distribution of the benefits.
Simply put, the bulk of the mortgage interest deduction is wasted on those who do not need government assistance to purchase a home.
The middle class would be much better served by a mortgage tax incentive with a more equitable distribution, or by alternative expenditures that boost the number of middle-class wage earners able to purchase a home. The government could help foster universal pre-K education, addressing America’s declining economic mobility and educational achievement gap. It could spur innovation, create jobs and invest in basic science by making the tax credit for corporate research and development permanent. It could invest in state-of-the art infrastructure, again helping to make the U.S. more competitive.
Policies like these can help the U.S. regain its position as a global leader in advanced industries — and help the middle class at the same time. These policies address the structural problems with our economy, such as trade deficits, wage stagnation and growing inequality. Fixing those problems will lead to increased home building and homeownership — not the other way around.
Tax reform
The good news is reform of the mortgage deduction is no longer the “third rail” of federal policy. President Obama and leading congressional Republicans (including Rep. Dave Camp, chairman of the House Ways and Means Committee) have proposed limiting the value of individual deductions including the mortgage deduction. It appears likely that some kind of reform will be part of any broader federal budget and tax deal.
Reform of the mortgage interest deduction is essential if the U.S. is going to have a tax code that builds a strong and resilient middle class and a housing policy that encourages homeownership in a fiscally efficient and effective manner.
The U.S. faces a clear trade-off in the aftermath of the Great Recession: continue to subsidize bigger homes on bigger lots or make the kinds of smart investments in innovation, infrastructure and education that will lead to a more productive and inclusive national economy. Will we make the right choice?
We worry about growing inequality and the dwindling middle class, and advocate various policies to reverse these trends. And yet at the same time, we talk about reducing or eliminating the tax deduction that does the most to promote a more equal distribution of economic well-being.
The mortgage-interest deduction is not a tax dodge for the rich. It is exactly what its staunchest advocates say it is: a financial incentive that helps millions of Americans achieve greater financial security through homeownership.
It’s misleading to compare U.S. homeownership rates with those of Canada and Britain. While neither has a mortgage-interest deduction, the U.K. has a program to sell public housing to residents on very favorable terms. Canadian taxpayers, meanwhile, can get a deduction for mortgage principal payments and a very generous tax break to help with down payments.
Define ‘wealthy’
Still, many criticize the U.S. deduction as a benefit mainly for the wealthy. To make this charge stick, they use a somewhat sliding scale to define “wealthy.” During the 2012 campaign, President Barack Obama called for raising taxes on “millionaires and billionaires,” although at the same time his budget proposed to raise taxes for married couples with incomes over $250,000.
But only about 60% of taxpayers with adjusted gross incomes of $250,000 or more claimed the deduction in 2011, and their deductions added up to roughly $45 billion — less than 12% of the $364 billion deducted nationally. Taxpayers with adjusted gross incomes of $1 million or more deducted only $5 billion, less than 2% of the total.
Some use a broader brush to depict the deduction as unfair. Instead of talking about “the wealthy,” however defined, they complain that the deduction mainly benefits those with upper incomes. There is a bit of truth to this. In 2011, for example, the 40% of all households with incomes above roughly $65,000 did receive about 75% of the total mortgage deduction.
But when you consider that this same group also paid more than 90% of all income taxes and received more than 85% of the deduction for state and local taxes, does it seem unfair, or even surprising, that it also receives most of the benefit from the mortgage-interest deduction?
A 2013 Congressional Budget Office study claims that just the top quintile gets 75% of the deduction’s benefit. But that was a forecast using 2006 data. My calculations use 2011 IRS data. I look only at tax filers, but that’s just about everybody (145 million tax filers, 114 million households in the U.S.). Since 2006, the top quintile’s share has increased (to 64% from 59%) as the total of deductions claimed has shrunk. But this isn’t due to unfairness in the mortgage deduction. It’s because those defaulting on their mortgages and losing their homes aren’t in the top quintile.
The deduction does benefit homeowners only, so to qualify one must have a certain income to start with. But more important, the benefits don’t increase as one moves up the income scale. The opposite is true. For individuals, the deduction matters more at the lower levels of the ladder.
Equity magnified
Consider, when your income is $65,000 a year, home equity tends to be a much bigger portion of your personal wealth than when your income is $650,000. Higher-earning homeowners tend to have large investment portfolios as well. And the more diverse their holdings are, the less important their homes are to their overall portfolio.
The Federal Reserve Board has reported that at least since 1992 homeowner equity has made up 20% to 25% of total U.S. household wealth. Stocks and mutual funds together also make up roughly 20% to 25%. Another share of roughly equal size is made up of unincorporated and closely held businesses, including proprietorships, partnerships and professional practices.
The importance of each type of asset to individual households, however, varies immensely depending on the level of household income. Among the top 10%, stocks and businesses account for 60% of their wealth; home equity, about 15%.
The middle class — those with incomes between $35,000 and $65,000 — has a very different portfolio. Home equity exceeds one-third of their assets, bigger than stocks and businesses combined.
The deduction helps families move into the middle class and live in comfort during their retirement years. It is about the only provision of the tax code that does. It’s worth keeping. WSG