I Have A Better Idea: Let's Just Kill It

Kevin Drum thinks the mortgage interest deduction is unfair because people with bigger mortgages get bigger deductions.  In particular, he is concerned that people with smaller deductions get no incremental benefit because these deductions are seldom larger than their default personal exemption.

But tax deductions are always going to be like this in a progressive system -- the rates are progressive and the fixed personal exemption is extremely progressive, so the combination of the two mean that tax deductions are going to preferentially help the rich more.  This reminds me of the arguments in Colorado when tax law required a tax reduction and Democrats in the state legislature complained that people who don't pay taxes would be getting no benefits from this.

He tries to posit some silly alternative tax credit system, but why bother?  Haven't we had enough of distortive tax breaks that favor a single industry and/or shift investment alarmingly into a particular pool of assets (thus increasing the risk of bubbles).  Isn't the whole notion of tax-subsidizing home ownership but not rentals inherently regressive, no matter how the deduction or credit is calculated?  Doesn't the labor market rigidity of home ownership most penalize lower income workers who get trapped in a certain geography by their home and cannot migrate for better wages, as blue collar workers have done in past recessions and recoveries?

Why wouldn't a good progressive like Drum be advocating for an elimination of the deduction altogether?  Is this one of those coke-pepsi party things, where the Republicans have taken over the issue of limiting deductions so Democrats have to reflexively defend them, even if ideologically it would make more sense for them to promote their elimination?


  1. David:

    Are you suggesting that all deductions be eliminated, perhaps in exchange for lower, flatter taxes?

  2. LarryGross:

    naw. you can cap them (for instance) on just the primary residence and adjusted for your income so that if you have a high income, you get less or none. That's essentially how the earned income credit works or the energy credit or in the Schedule A your Medical deductions or your work-related deductions.

    there are all kinds of ways to limit the deduction if they really wanted to.

    the most obvious is to limit it to only the principle residence and cap it according to income.

    what you are deducting is the INTEREST and real estate taxes. Most folks cannot even use the itemized deduction unless they have very high out-of-pocket medical or significant mortgage interest.

  3. matthew.slyfield:

    I'll support that.

  4. Joshua Vanderberg:

    You'd have to phase it out over time as it will cause a corresponding decrease in house price and you don't want to hit current owners all at once. So maybe a 10-20 year phase out of the deduction? I could support that.

  5. Jim Hu:

    Abolition does not preserve jobs for lawyers.

  6. LarryGross:

    I guess folks here remember when you used to be able to deduct the interest on your car, eh?

  7. Dan Sherman:

    If he proposed eliminating them, he'd be led by the nose down the road of "eliminating all the loopholes" that Romney was proposing. And a good Democrat can't even be seen in the neighborhood of something Romney proposed. Despite common sense or logic.

    Always remember... to Dems, the value of any idea is based on how it makes them FEEL. Not the logic or common sense of the idea. It's essential to remember that when dealing with these illogical conundrums.

  8. WesternRover:

    Many people I prepare taxes for are able to itemize because of a modest mortgage plus giving 10% of their (usually pre-tax) income to their church. But that's not a statistically random sample.

  9. Earl Wertheimer:

    "advocating for an elimination of the deduction altogether?"
    No. Once you accept that the government is the only way to improve society, then eliminating something is going to be a problem. Add a new program or deduction. That would be acceptable.

  10. steve:

    "Why wouldn't a good progressive like Drum be advocating for an elimination of the deduction altogether?"

    Making homes more affordable to middle, lower, no income people is a big progressive ideal. That means it must be subsidized. They could accept jiggering the deduction to better help the poor or help the rich less. But, that is about all their "affordable homes" goal allows. Obama is even back to trying to get the banks to reduce their lending standards again using the affordable housing argument.

  11. steve:

    subsidy is a horrible word to use for not taxing someone. But, that is how the progressives will think of it.

  12. David M. Nieporent:

    Is this one of those coke-pepsi party things, where the Republicans have taken over the issue of limiting deductions so Democrats have to reflexively defend them, even if ideologically it would make more sense for them to promote their elimination?

    Probably. What has stuck with me is how, about a year or two ago, lefty blogs were getting upset that Republican pseudo-budget cutting was threatening the Export-Import Bank. The Export-Import Bank. A bigger piece of corporate welfare it's hard to find. But Republicans were against it, so suddenly they were for it.

  13. Guest:

    Obama is heading in the direction of "no deductions at all for the 'rich'". You will note that after reintroducing Pease, which at its limit takes away 80% of the value of your deductions, he now wants to limit what remains to a 28% rate. I hardly see the point, the marginal increase in tax dollars is trivial after you've been screwed by Pease. It's rather like kicking you after you're down.

    Don't forget that you can't deduct mortgage interest on more than a million dollars (not inflation adjusted) of principal.

  14. FelineCannonball:

    I suspect it's because it's the third rail of people that think that they're middle class. I'm guessing Kevin would support getting rid of it if it was politically viable.

  15. perlhaqr:

    the most obvious is to limit it to only the principle residence and cap it according to income

    Except that doesn't make much sense either, because different geographies have different "meaning" for the same income level.

    If I was making $150,000 in Albuquerque (I'm not making anything close to that) I'd be relatively speaking pretty goddamn rich. If I was making $150,000 in San Francisco, I'd barely be scraping by, and I certainly wouldn't be able to afford to own a residence,

    I think the better plan is to get rid of all the deductions (except business related stuff, of course, but that's a different sort of thing) and lower each of the tax brackets 5% or so.

  16. johnson85:

    This is incorrect: "Isn't the whole notion of tax-subsidizing home ownership but not rentals inherently regressive, no matter how the deduction or credit is calculated?"
    Rental owners can deduct mortgate interest and taxes also, so not allowing deduction of mortgage interest for homeowners would be allowing renters a benefit (indirectly) that homeowners don't get. Homeowners do often get preferential treatment on property taxes, being assessed at a lower rate than rental property, which is sort of stupid.

  17. LarryGross:

    owners of rental property can write off Schedule E business expenses including interest without using the Schedule A mortgage interest, right?

  18. marque2:

    Killing the mortgage tax deduction is stupid. I don't understand why conservatives and libertarians fall for this tax grab. Lets look at some other investment.
    I want to open a business, so I take out a loan to purchase equipment, and build facilities. At the end of the year I need to figure my profit, so I take all my sales and subtract all my expenese. The interest on that business loan is an expense! I get to deduct it.
    Lets say I want a loan to buy some stocks. Again, the interest is expensed against any profits I might make on the stock.
    Lets say I do the same with a home - buy it get a loan and rent it out. I also subtract the interest payments from the rent in determining the profit, because it too is a legitimate expense.
    So now lets say I invest in a property for my family. I choose to live in it instead of rent it out. I pay imputed "rent" for the place, and should be able to deduct the interest from my profits. At the very least I should be able to add up all the interest I pay, and add it to the base when I sell the home. A home is like any other investment. Currently we get dinged, because we have to beat the standard deduction on the loan.
    What really should happen is we get full deductability for the home interest, (or add it to the baseline) but get rid of all the breaks when a homeowner sells the house (eg the 250K per person tax exemption)

  19. marque2:

    Another note on this, if we lose the partial deduction on home interest - I think a lot of us would just end up purchasing homes, and just about immediately leaving (after a year) and renting the place out - even going into a rental onself. That way you would be able to get full deductions on all expenses related to your house.
    Look for folks to do property swaps to accomplish this as well.

  20. marque2:

    You can't do that. For every business - you base your income from gross sales minus expenses. Interest expenses aren't just some perk but a legitimate expense for the business, just as salaries, rent, and utilities are legitimate expenses.
    If you invest in a home for a family, you should also be able to deduct your investment expenses on the home. Homeowners are already penalized by having to meet the standard deduction first (this is more problematic for non-coastal states)
    And to come up with a flat 10% based on gross sales, would be bizarre in itself. It would encourage low labor, low investment businesses with high gain. This would discourage a lot of small businesses.

  21. marque2:

    Loopholes I understand. Foriegn trade investment credits. And international advertizing credits, price support programs ... all should be done away with.

  22. marque2:

    And credit cards. I think Reagan gets blamed for getting rid of those deductions.
    Of course those deductions are not on an investment. Cars get used and go down in value, credit cards are used mostly for short term purpose.
    House mortgage interest is different because the house is an investment, which appreciates, and allows one to accumulate wealth. I can't think of another legitimate investment where I can not deduct the expenses I have from the investment.

  23. marque2:

    It is already capped. I believe you can only take deductions on the first million dollars of loan.

  24. John White:

    Living in New Zealand, and before that in the UK, we are not able to claim for mortgage interest on a personal house, yet plenty of people still buy houses. There is no way I would rent a house long term rather than buy. The UK did have mortgage interest relief until the late 80s, but this was capped at something like US$ 45,000 to 60,000 value loan which for most people was meaningless. @facebook-100000013695888:disqus when the UK get rid of the relief there was about a 5 month warning, I think announced in March with effect from August. This did lead to a short term bubble as people rushed to buy before the cut off. Here is the history, http://en.wikipedia.org/wiki/Mortgage_interest_relief_at_source

  25. marque2:

    OK so you say folks won't change their behavior, but the real question is

    Why is Warren Buffet, a billionaire allowed to deduct all the expenses for his investment.

    But for lower middle class where their only major investment in life is probably their house, they should not be allowed to make the deduction.

    Why is that fair or good. We already get penalized because most folks in this country barely get over the standard deduction and therefore can not write off much of their home interest costs anyway.

  26. marque2:

    Yes. And it is a top line deduction, - however if you live in the dwelling you have to beat the standard deduction, so for most folk not all the interest can be written off.

  27. marque2:

    It is a Republican tax grab - and supported by big business interests like the Wall Street Journal. More proof that Warren is right about the coke-pepsi thing. They all want bigger government, all want more taxes, GOP just wants different things and is a bit slower about it.

    Tea Party is having some influence however.

  28. John White:

    I don't class my house as an investment. It is a place for me to live. I don't expect a tax deduction for my food, my fuel, my clothing, so why should I get one for where I live? Buffet will also be taxed on the profits he makes in his investments, so you want to be taxed on the profit in your house?

  29. marque2:

    Homes are subsidized in other ways, like you get a tax break selling them if they are a primary residence. The government sponsors Fanny and Freddie. But allowing one to write of expenses for an investment is something 100% allowed except for your personal dwelling. Eliminating the deduction seems more like a tax grab, rather than an elimination of a subsidy.

    If you consider this an elimination of a subsidy, none of our income is safe. Increasing any taxes is then the elimination of a subsidy.

  30. LarryGross:

    If you consider this an elimination of a subsidy, none of our income is safe. Increasing any taxes is then the elimination of a subsidy.

    geeze - they gave subsidies for car loan interest - and they took them away and during that same period they gave credits for energy installations and education and kids, etc.

    I'd be fine with the mortgage interest if it was ONLY for ONE primary residence AND it was income-tested like the child, energy credits are or limited like health and "other" expenses are in Schedule A.

  31. marque2:

    A Car is not an investment. Buying an HE clothe washer is also not an investment. Property IS an investment. Sorry doesn't wash.

    They may have allowed car interest deductions and they used to allow credit card interest deductions as well, but again Credit card purchases, and Car purchases are in general not an investment.

    Investment related expenses should be allowed to be written off, just as business expenses are allowed to be written off, because investments are business decisions.

  32. marque2:

    Subsidy is being redefined for not taxing someone. EG oil companies are given a subsidy, according to progressives because they use FIFO accounting which makes profits seem higher when oil goes up (they are silent when oil goes down however)

    There are real subsidies (cash credits for foreign advertising)and price support programs (sugar), and various other favors progressives do like to grant - which are real subsidies and should be removed, but in those cases we hear crickets.

  33. marque2:

    Just because you don't understand what an investment is or are too rich to realize you have an investment - do you also have that million dollar stock account you don't consider an investment because it is just play money - doesn't mean you should take it out on the rest of us.

    Your other examples are lame, it is pretty hard to invest in your food and clothing and sell it for a profit years later, or use it as an value store, but it is not hard to do that with a home.

    Again, you are allowing the really rich to deduct all their expenses from their investments, but for blue collar middle class, whose only large investment is the house, and who will likely sell the house in retirement so they can survive retirement, they way you should with a retirement investment - you are denying them the same right as the billionaire. In fact, for me to retire, part of my plan is to sell the house and live off the proceeds.

    Why do you liberals hate the poor so much?

  34. John White:


    I certainly know what an investment is, and it is not my house. As for me being rich, that is so far away as to be beyond thinking about, although I would not say I am poor. My only stocks are held in my retirement account, and is way way way short of a million dollars.

    If you buy investments such as stocks, gold, do you get deductions for that for tax purposes? As I say I am not in the US, so maybe the tax system is different. Here in NZ (and when I was in the UK) we cannot deduct for house interest, or stocks etc. If you are classed as a 'Trader' of stocks then you can claim for losses on stocks, but then you are also taxed on the profits of stocks. As I am not a trader then I am not taxed on the profit of my stock, and therefore also cannot claim the losses on them. If you buy houses for investment purposes then you can claim the interest cost against your tax, as you doing that as a business, but then you are also taxed on the profit when you sell the house. Are you taxed on the profit when you sell the house in the US?

  35. marque2:

    If you buy stock you do get a deduction for expenses related to that investment, Say you purchased $1000, paid $100 commission, paid $10 in management fees, and sold it for $1200, after a year, you would only owe capital gains on "the profit" of $90 (1200 - 1000 - 100 - 10) as you should in New Zealand as well. If you couldn't deduct expenses on investments (another name for business decisions) then very few would invest.

    A home in the US is considered an investment legally as well. When you sell the house you have to pay taxes on the increase based on the investment "capital gains rate of 15% rather than the current income rate. Also if you sell a house within a year, you have a short term investment. All the rules for investment apply to houses in the US. Because politicians have gotten obnoxious, they have enacted a special sales rule - which changes from time to time, so I don't know the current figure, but when you sell a house you have lived in (I believe it is currently 2 years out of the last 5) you get an exemption on the first 250K or it might be 500K of capitol gains. Also repairs to the home increase your base (You paid 300K for the home, redid the roof, for 5K repainted for 5K and installed a new kitchen for 5K and then sold the home a year later for 570K (I know a bit ridiculous) - you would pay capital gains on $5K (570K - 300K - 250K* - 5K - 5K - 5K). The upshot is you need to save all receipts related to your home just in case you ever sell it.

    Gold interestingly is classified as a collectible by the IRS, though I agree it should be an investment if not in jewelry form. So selling gold at a "profit" results in a 28% income tax.

    If your home were disposable and when you were done with it, you tossed it in the trash, I would agree - it is just a dwelling. But you are enriched by having a home, because when you retire you will be able to use the money from the home to live, ether by selling it, or by doing a reverse mortgage. I would suggest that New Zealand, has convinced folks your country that a home is something else, when it is not. On the other hand. If they grant you other concessions like not paying capital gains when you sell - well it might all be a wash anyway. Somehow in the USA I don't think they would take away the Cap gains tax at the end if they eliminated the deductions at the beginning.

  36. LarryGross:

    naw... if it were a REAL investment, you could write off all the maintenance and operation costs plus insurance... and you can't so it's not a REAL investment at all.

  37. marque2:

    Yes, you and your neighbor could swap houses and the entire mortgage expense would be top of line, no need to meet the standard deduction first. Removing the interest rate deduction will actually encourage house swapping.

  38. marque2:

    See how much the government is already penalizing us for owning property, and you want more?

    But no, technically that stuff is "written off" against your imputed income. So your silly stuff comes out as a wash.

  39. John White:


    Looks like I need to bow out of this, as the tax system in the US is so different to NZ. We do not pay any capital gains tax, we only have income tax.

    If you as an individual buy and sell stock there is no tax on the profit in your example as it is classed as a capital gain. If you buy and sell shares as a business, e.g. you trade in them as a professional then you still do not pay capital gains tax, but the profit is classed as income tax. (or Corporation Tax).

    If you own and buy a house in NZ there is no capital gains tax to be paid (in the UK there is capital gains tax but it does not apply to personal residence and there is no limit like your 250k). If however you buy AND sell houses in NZ then you can be taxed on the profit as it will be classed as income not capital gain. e.g. if you buy a house, repair and decorate it, never live in it and sell it, then that is classed as income and not capital gain. If you buy houses, rent them and then sell them then you will probably only pay income tax on the rental, not the capital profit on selling. As far as I know this means that capital repairs cannot be offset against the rental, e.g. if you buy the house in your example and put renew the roof and paint it, then that is a capital repair and cannot be offset against the rental income, if you repair the heating system then that is maintenance and can be offset against you rental income. Mortgage interest can be offset against rental income. There is a distinction in NZ and whether for property you are an investor or dealer. An investor would buy the house, and rent it with no immediate plan to sell. An investor does not pay tax on the capital gain. A dealer would buy the house with the expectation of selling it. A dealer would pay tax on the profit from selling the house.

    A major part of NZ tax law is based on personal benefit, so if you receive personal benefit then you cannot use that in your tax calculation, so this means for example that you cannot rent a house to yourself and then claim deductions as you will receive the benefit of living there

  40. marque2:

    Thanks for the input, this is probably why we have different views on the issue. In NZ they don't charge you taxes on your gains in housing - or in stock in the US we do.

    Interestingly this was part of the attack against Romney in the last pres election. Corporates pay 38% tax on income and then distribute much of the rest to shareholders who then pay an additional 15% - folks here said, that is awful that a rich person can get away with paying so little even though the real effective rate is 45% folks just saw the 15% and many said it wasn't enough. In NZ seems like you don't have this as a class warfare issue.

    With rentals in the US it gets complicated as well. Repairs can be written off that year, items which are long term investment, like the roof are added to the base and have to be written off on a 27.5 year schedule. IRS forces you to depreciate the entire value of the home (not the actual property though) over a 27.5 year period as well, so at the end of 27.5 years you would own cap gains on the entire home - unless you move into it for the last two years.

    Yeah, we definitely need tax reform here in the USA - it is way way to complicated.

  41. LarryGross:

    been suggested that a CREDIT might have some advantages over a DEDUCTION because the credit would still encourage and reward home ownership but not necessarily debt - or at least incentivize looking for less or lower debt.

    The credit could be means-tested by AGI (like other credits) and limited to ONE credit for ONE house instead of 2nd vacations homes and RVs,etc.

    A CREDIT may also encourage people to buy more modest homes that they can afford rather than getting themselves into a loan they cannot afford.

  42. Patrick Loftus:

    Be careful what you wish for.
    Congress passed an income tax law in 1890s which was declared unconstitutional by the Supreme Court. That law included a deduction for mortgage interest. At the time it was unheard of that one would get a mortgage for a residence. A person purchased land in town then built a house, or they purchased a house already in place with cash. Only farmers had mortgages because the cost of 600 acres was high enough that few had cash to purchase a farm. The loan was repaid with the profits earned by producing a surplus of crops or livestock. It was a business expense which often happened to have a dwelling on the property.
    With an amendment to the constitution the income tax was passed in 1913. The mortgage deduction remained in place. At that time there was an insignificant mortgage industry for financing residences. The initial tax rates were highly progressive so that few gained significantly from the mortgage interest deduction. This remained the case until well after the second World War.
    As many decades passed the mortgage interest deduction was baked into the taxation cake. Should it have started this way? Probably not but, at the time, no one imagined it would be part of most peoples' lives. No one imagined that the governments would be taking half of the earnings of working people. We could abolish it now and expect the value of properties to decrease approximately 15% ( if the National Association of Realtors' economists know their business ). Another banking meltdown would follow. Perhaps a committee of super smart economists and politicians could micromanage the gradual dismantling of the interest deduction in a way that hurts few people and doesn't have unintended consequences. Sure.
    The entire income tax code is a sump of 100 years pandering to various interests. Rather than try to finally make it perfectly just, wouldn't it make more sense to simply reduce taxation and spending enough so that these special favors would become irrelevant for most people?

  43. LarryGross:

    why incentivize debt though? why not just incentivize having ONE house of modest dimensions and let people seek to avoid as much debt as they can to own the house rather than have a system than incents them to seek as much debt as they can get?

  44. markm:

    It's never been a subsidy for me. I never bought a house with bigger mortgage payments than I could afford, and the mortgage interest deduction was always much less than the standard deduction. If it did anything affecting my segment of the market, it hurt me. As Warren has pointed out elsewhere, it brought more money into the housing market and helped run up the prices.

    So it seems to me that, if this is a subsidy, it's a subsidy to the upper-middle-class and to the fools that helped bring us the housing bubble.

  45. markm:

    Property is an investment only if it is income-generating. A house you buy and rent to someone else may be a good investment, if your tenants actually pay the rent and if you can keep the expenses (repairs, insurance, taxes) down. *Your* house is an expense. It is possible that you'll someday be able to recover *part* of that expense by selling the house, but unless you can manage to do that near the peak of a bubble, you won't get what you put into it plus a reasonable return on the investment.

    And if you can sell your house at an inflated price, you're going to have to pay an inflated price for somewhere else to live - so it doesn't really get you ahead until you're dead or waiting to die in a nursing home.