Friday, November 30, 2012

The Mortgage Interest Deduction: Will the Sacred Cow Finally Get Roasted?

Don't count on it.  But the very fact that the enormous government subsidy that is the mortgage interest deduction is being discussed in the 'fiscal cliff' chatter is remarkable.  The Washington Post reports that the most sacred of sacred cows suddenly looks tasty to lawmakers.

The article even contains a nice quote from a law prof:

Edward Kleinbard, a tax expert and law professor at the University of
Southern California, said the mortgage-interest deduction represents the kind of
government “extravagance” that the country no longer can justify, given its
fiscal troubles.

“We simply cannot afford wasteful government subsidy programs anymore, and
this is one of the most important examples of that,” Kleinbard said. “It’s very
much a subsidy to those Americans who need it least.”

Professor Kleinbard is right: the mortgage interest deduction is a strange and regressive tax subsidy.  It benefits most those who need it least.  And, it encourages borrowing and discourages homeowners from putting equity in their homes. 

And yet, it is so deeply embedded in our real estate system that almost every home in America would have to be devalued if it was eliminated, because potential buyers figure the deduction into the amount they can pay for a home.  And it has friends with money and influence: the construction industry, realtors, lenders.

Still, its long term future isn't as rosy as it once seemed.  Logically, it ought to be at least capped if not scrapped.  But a cap would hurt those best able to make sure there is no cap, so I'm guessing we'll still be having this discussion many, many years from now.  What do you think?

Mark A. Edwards

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