Dean Stansel is an economics professor at Florida Gulf Coast University. Anthony Randazzo is director of economic research at the Reason Foundation.
Excerpts:
"The federal income tax code is full of complicated deductions, credits, and loopholes, which together exempted $1.2 trillion from taxation in 2009. The single largest benefit, amounting to around 35 percent of the total, is the mortgage interest deduction. This longstanding incentive, which allows individual taxpayers to deduct up to $1.1 million in home loan–related interest payments from their taxable income, has warped the real estate market and overwhelmingly benefited higher-income Americans, all while failing to achieve its stated policy objection of promoting homeownership. As Congress continues to debate federal budgetary and tax policy in an atmosphere of debt ceilings and ratings downgrades, the time has come for the mortgage interest deduction to go.
All taxes on income create distortions in economic decision-making. The more something is taxed, increasing its relative cost, the more individuals will substitute a good that is comparatively cheaper. This is as true of taxes on income produced by labor and capital as it is of taxes on goods and services. Such market distortions reduce efficiency, creating what economists call excess burden or deadweight loss.
The least distortionary income tax system is one with the broadest possible base and the lowest possible marginal tax rates. If that $1.2 trillion in itemized deductions was instead spread throughout the tax base, the average tax rate could be reduced by roughly a fifth, from 17.8 percent of taxable income to 14.5 percent. Such a tax cut would directly increase the reward for productive, income-generating activity. Closing loopholes such as the mortgage interest deduction while lowering overall rates would lead to a more productive economy."
"In 2009, only 22.1 percent of federal income tax returns contained the mortgage interest deduction. (The figure has remained between 21 and 26 percent since 1991.) Data from the congressional Joint Committee on Taxation (JCT) shows that only a small portion of taxpayers with incomes below $50,000 claim the deduction. In contrast, two-thirds of those with incomes above $100,000 do so (see Figure 1)."
"How big is the benefit? According to the JCT, after you adjust for the difference between the standard deduction and the mortgage deduction, for a taxpayer with average income, the mortgage interest deduction is about $10,000 but only reduces taxable income by $7,600. At the 2009 average tax rate of 12 percent on adjusted gross income, that amounts to a tax savings of $912, or $76 a month.
But these numbers provide an incomplete picture, since the tax savings can vary substantially based on income level, age, and location. Using the most recent data from the JCT and the Internal Revenue Service, we found that taxpayers with incomes below $75,000 save less than $200 per year, while those with incomes above $200,000 save about $1,800 (see Figure 2). As a percentage of their overall tax bill, however, the lower-income groups save more."
I agree with scrapping the mortgage tax deduction, but not for its regressive nature (which I think is the point of the excerpts above). I just think our tax code is too complex and we have to eliminate all deductions. No sacred cows.
ReplyDeleteThe one objection that sticks with me is how the mortgage deduction is factored into housing prices. Are you aware of any data telling us how much housing prices might fall if the deduction were dropped?