The home mortgage interest deduction should be eliminated in the United States

I would like to start by clarifying that the resolution states the mortgage interest deduction (MID) should be eliminated. In Pros conclusion however she states that it could be phased out over ten years. Eliminating and phasing out have two different definitions, which has an impact the argument of choosing our best course of action. Although this point is not overly significant, it should be considered. Impact on housing prices A point that Pro and I agree on is that the MID does not appear to have an impact on home ownership rates overall. Although common logic would likely dictate that incentivizing people to buy a home would increase the number of people that would do so, there are 2 factors that would also need to be considered: First, people don’t buy a home for a tax break. Their decisions are usually much more emotional and personal then that. Second, anything which increases the ability of a person to buy a home, would also increase the ability for another person to sell that home. In other words home values are higher because of the MID, which means that eliminating it would have a negative effect on those same values. Pro states that according to “two researchers” eliminating the MID would increase home ownership rates for adults 25-34. Pros source (#1 page 3) verifies this but it also states that it could cause housing prices to drop by as much as 10%. So yes that would give younger people an opportunity to buy homes but would not be good for the millions of Americans who own a home and are currently “under water”, and perhaps even considering foreclosure. This problem is right at the heart of where this recession began and is still struggling to recover which is where eliminating this deduction (or even phasing it out) would directly impact. Economic Inequality Pro suggests that the MID is contributing to economic inequality in the US. Her first illustration of this is to show that only 23.4% of individuals making less then $40,000 a year benefit from it. This however does not tell the whole story. Let’s look at her source in detail (#3, page 11): Age____% Who Itemize25-35...........54.335-50...........51.850-66...........33.7>65..............3.8ALL.............23.4 As we can see this 23.4 average is greatly brought down by the age groups of 50+. A very simple explanation for this is because at that age it would be expected that homeowners are entering the final stages of their mortgage where they pay very little interest, so there is nothing to deduct. This point however brings up the question of where the MID is being utilized. To take a deeper look at this I put together the following chart, as quoting too many statistics can get confusing. This compares by income group, the percentage of total federal individual income taxes paid to the percentage of MID received by those same income groups: Income_______Taxes paid(1)_____MID deduction(2)<$10k.....................0%....................2%$10k - 20k…………….0%....................2%$20k – 30k…………….2%....................5%$30k – 40k…………….3%....................5%$40k – 50k…………….4%....................7%$50k – 75k…………….10%..................17%$75k – 100k…………..10%..................16%$100k – 200k…………22%...................25%>$200k………………...49%...................21% As you can see by this chart, not only does the MID not contribute to wealth inequality but it actually shifts the deductions down to the middle and lower classes. In all, American households making less then $200k a year pay only 51% of all federal income taxes, yet they receive 79% of the deductions. The reason for this balance is simple. Households above $200k yr make up only 5% of all households in America and the MID has a limit based on a principle loan balance of $1 million and $500k for singles, so contrary to Pros assertions it is nearly impossible to be abused by the rich(3). Cuts would be aimed at those who have lost the most We all know that the housing market was severely hit in late 2008. Anyone who owned a home saw their net worth take a major hit, and for many saw it lost entirely. Those Americans who found themselves in a housing situation they should not have been in are most likely not homeowners at this point. But those who purchased homes responsibly and are still paying their mortgages are still working everyday to keep what they have worked for. Residential real estate is the main tool that lower and middle class families have to build their wealth and because of the impact on housing prices I mentioned earlier, eliminating these deductions would essentially be aiming budget cuts at Americans who lost the most through this recession. The “shift” in lower home values would also be passing the benefit to new homebuyers instead of the people who have already worked for them. To further illustrate the impact of home values to lower class wealth allow me to show another chart put together by the University of California(4). This chart shows Net Worth vs. Financial Wealth. Just to ensure clarity, net worth is the value of everything a person owns minus their debts. Financial wealth on the other hand is often defined by economists as “non-home wealth” which is basically net worth minus the value of a person’s home. Financial wealth is intended to show how much cash a person has access to, as a home is not easily convertible. Percentile_________Net Worth_______Financial Wealth1%.............................35%........................43%2-10%........................38%........................40%11-20%.......................12%.......................10%Bottom 80%.................15%........................7% As we can see here once we take the value of a person’s home out of the equation, most American families have little else left. Now, I am not suggesting that eliminating the MID will drastically change a persons net worth, I just intend to show further that home values are much more important to most American families and we should not be aiming budget cuts at people who worked for what they have, and have already lost enough. National Debt I certainly do not argue that the budget is out of control and needs to be balanced. I would contend however that there are better ways to do it. If we are trying to increase tax revenue I would argue that a small across the board tax increase would be better then increasing the tax burden only on homeowners for all the reasons I mentioned. Conclusion I agree with Pro that homeownership rates will have little effect. However contrary to Pros argument, eliminating the deduction would only further increase economic inequality. It would also focus the cuts right at the heart of the recession and focus on those who have already worked to build their net worth in favor of new buyers. If we want to increase tax revenue there are much better ways to do it. (1) http://www.irs.gov... (2008, table 3.5, column 4)(2) http://www.irs.gov... (2008, table 2.1, column 79)(3) http://www.irs.gov...(4) http://sociology.ucsc.edu...