Thursday, June 10, 2010

Mortgage interest deduction in the news again

I wrote previously but imperfectly on the mortgage interest deduction here. I'll restate my arguments in favor of the mortgage interest deduction (MID) below, hopefully omitting the stupid parts this time.

Instapundit links to this article in The Hill:

Although Congress last year rejected the White House’s proposed cut to the amount wealthier taxpayers can deduct for home mortgage interest payments, the administration included it again in its 2010 budget — saying it could save $208 billion over the next decade.

"Save" $208 billion. Isn't that clever. Not "raise." Not "increase tax receipts by." Save whom?

I find the framing of the eliminationist argument to be dishonest. Continuing to not tax what has never been taxed "costs" the government billions. Eliminate deductions for a few forms of personal interest and what remains deductible becomes a "subsidy."

Michael Kinsley says he was against the mortgage interest deduction before he was for it:

How can you recognize a tax subsidy? You look to its ostensible purpose. There are deductions and credits in the tax code that are intended to make taxes fairer, and then there are deductions and credits that are intended to promote some other public purpose. The second category are tax subsidies. Sometimes it’s hard to tell.

But Kinsley can tell. (It's a subsidy.) And yet, when Grandpa Kinsley was filling out his 1913 Form 1040, there was line 2 of General Deductions, "All interest paid within the year on personal indebtedness of taxpayer." The ostensible purpose here is likely to prevent the double taxation of interest. The fact that the MID now takes on a special apparent social purpose is a function of its having survived the 1986 destruction of this reasonable principle where auto loans and credit cards did not.

Regarding imputed rent, I don't think I can do better than I wrote last time:

The benefit that homeowners receive is called imputed rent. This is the rent they would have paid to rent their own place if they didn't own it, or would have received if they rented it to someone else. Rental income is taxable to a landlord, but this imputed income is not taxable to a homeowner. Unfair? Landlords can also deduct maintenance, depreciation, salaries, etc. Homeowners cannot. If the imputed rent should be taxable, then the expense—both real and imputed—of maintaining the home should be deductible. A more equitable basis for taxing homeowners would be a tax on imputed rental profit. In nearly every case this will be much less than the MID. There could even be an imputed loss. It's a difficult value to estimate, and might easily be gamed.

Finally, I still find absurd the argument that the MID is regressive because 50% of the mortgaged don't itemize. The ordinary components of the itemized deduction are mortgage interest, property, state and local taxes, and margin interest. The standard deduction is a somewhat generous minimum estimate of these same components, is it not? Generous because about half of mortgage holders find it exceeds their own interst and tax expenses. Generous because it is offered even to those with no mortgage interest and property tax expenses, like renters. Why should renters get this special deduction for expenses they don't even have? Why is the tax code subsidizing renters?

I kid. But seriously, those who write in favor of eliminating the MID usually end with some phrase like "never gonna happen." Hopefully they're at least right about that.

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