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Posted at 4:05 PM ET, 11/16/2010

Who does the mortgage-interest deduction benefit?

By Ezra Klein

Alex Hart has a good post examining whether the mortgage-interest tax deduction -- which will cost taxpayers $131 billion in 2012 -- is really a "middle-class tax break," as some people like to claim. The answer is no, but it really deserves a graph:

mortgagedeductionpercent.png

As you can see, the less money you make, the less the mortgage-interest tax deduction does for you. But putting it in percentile terms understates the situation, as 1 percent of a big salary is a lot more money than 1 percent of a small salary. So here's the same graph in raw dollars:

mortgagedeductiondollars.png

On both graphs, the benefits for the bottom 40 percent of the income distribution are invisible. That's not because they literally don't exist, but because the deduction is worth $2 to people between in the bottom fifth and $32 for the quintile after that. As for the top 1 percent? They're getting a break of more than $5,000. I'm not really clear why we're giving people making hundreds of thousands a year large subsidies to buy a house, but I'm sure there's a good reason.

By Ezra Klein  | November 16, 2010; 4:05 PM ET
Categories:  Charts and Graphs, Taxes  
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Comments

Ezra, you've posted so many killer charts lately - could you please take over communications for the White House?

Posted by: sprung4 | November 16, 2010 4:19 PM | Report abuse

>>'m not really clear why we're giving people making hundreds of thousands a year large subsidies to buy a house, but I'm sure there's a good reason.>>

They vote, they give campaign contributions, they squeal loudly if deprived of anything.

Posted by: fuse | November 16, 2010 4:19 PM | Report abuse

"Who does the mortgage-interest deduction benefit?"

Politicians. See Fuse's comment.

"Alex Hart has a good post examining whether the mortgage-interest tax deduction -- which will cost taxpayers $131 billion in 2012"

Tax deductions are a "cost" to taxpayers?

Spending is the only thing that can cost taxpayers anything. If the government spends $10 billion, then the tax burden is $10 billion, regardless of whatever the tax code says. It is either paid directly, paid indirectly with higher prices, or paid in the future with interest.

Posted by: justin84 | November 16, 2010 4:35 PM | Report abuse

People who make a lot of money by expensive homes and pay more property taxes. While it may sound simple to do away with the deduction has anyone written about the knock on effect it would have on on house prices, home ownership rates and local tax receipts?

Posted by: mmcgrew1 | November 16, 2010 4:35 PM | Report abuse

It's kind of bogus to use a non-linear scale on the horizontal axis. The top 1% represents a lot fewer people than the 80-90 percentile. One tenth, to be precise. The top one percent is getting roughly twice as much per household as the 80-90 percentile, but the 80-90 percentile represents 10X as many people and therefore cumulatively much more money.

Posted by: tl_houston | November 16, 2010 4:37 PM | Report abuse

I always thought one of the reasons for such an exemption was to encourage people to buy homes, set down roots in a community, maybe start a family and become good citizens.

Certainly, people will still buy houses if they eliminate the deduction. But there will certainly be less incentive to do so, particularly if they're not building home equity, something that may not return in our lifetimes.

At any rate, it will be an interesting social experiment with perhaps some unintended consequences. Maybe good, maybe bad. But unintended, nonetheless.

Posted by: Hieronymous | November 16, 2010 4:47 PM | Report abuse

The mortgage deduction makes no sense, and has not made any sense for a long time, if ever. It should go, along with most other deductions and exemptions, and hasten a return to an honestly progressive tax system.

Posted by: csaether | November 16, 2010 4:48 PM | Report abuse

Lomillalor and lauren2010,

see now you not only disagree with etdean1 but also Ezra too. The end of the mortgage deduction is not a right wing conspiracy to take more from the poor. It also has outlived its usefulness especially since homeownership is so cheap with mortgage rates at the lowest amount in a half century. And yet people STILL aren't buying or locking in.

Posted by: visionbrkr | November 16, 2010 5:00 PM | Report abuse

Of course, the problem with removing the deduction (with I agree with in concept), is that existing homeowners, and especially recent purchasers, could face significant financial losses as a direct result. Housing pricing absolutely takes into account the effective discount of the deduction. It was certainly in my calculations when I bought my house a year ago. In the early years of your mortgage its a subsidy equal to your margin tax rate multiplied by your mortgage payment (since your mortgage payment is almost all interest).

If not phased in over a long period, or balanced with lower overal tax rates (for all taxpayers, not just the non-"rich"), people are either going to suffer foreclosures or see their savings decimated from selling their houses at a loss. The impact is not minimal.

That is the probably with social engineering with the tax code. You set up a system, and people adapt to it, even with long term commitments (like mortgages). Then any significant changes hurt people who acted in good faith based upon the old system.

Posted by: WEW72 | November 16, 2010 5:00 PM | Report abuse

The problem could be solved by capping the deduction instead of repealing it entirely. Limit it to $2500 or $3000. The middle class will still get their break and if somebody wants to buy a McMansion, they can do so at their own expense.

Posted by: tl_houston | November 16, 2010 5:20 PM | Report abuse

The mortgage interest deduction levels the playing field vs. renting. If the deduction were eliminated, I could move into my neighbor's house, and he could move into mine. We would pay rent to each other, and we could each deduct our mortgage interest as a business expense.

Posted by: davidleetodd | November 16, 2010 5:32 PM | Report abuse

--*the mortgage-interest tax deduction [...] will cost taxpayers $131 billion in 2012 *--

LOL. Not having to pay taxes is a cost to taxpayers. Paying taxes is a net benefit to taxpayers.

Does Klein ever consider how stupid he, not only sounds, but is?

Propagandists end up making some of the funniest statements in attempting to justify the massive theft and value destruction by the government.

Posted by: msoja | November 16, 2010 5:48 PM | Report abuse

>>I'm not really clear why we're giving people making hundreds of thousands a year large subsidies to buy a house, but I'm sure there's a good reason.

I'm pretty sure congressfolk want large subsidies to buy their houses. How many houses does McCain own??

Posted by: will12 | November 16, 2010 5:51 PM | Report abuse

davidleetodd is correct--if you really plan to remove the mortgage deduction, you should remove all deductions for investment and business expenses. Just let that sink in, small (or large) business owner. And Ezra--just whose deductions do Bowles and Simpson want to keep?

Posted by: pjro | November 16, 2010 6:11 PM | Report abuse

See what silly discussions we can have when writers take commission reports more seriously than legislators?

Nothing in this commission is ever going to pass as legislation. Stop all the nonsense what if's.

Posted by: 54465446 | November 16, 2010 6:47 PM | Report abuse

Legal incidence <> Economic Incidence. I would hope that Ezra understands that.

As others have pointed out above, buyers take the discount into account when bidding on housing so a part of the benefit accrues to the seller or builder. All in all the net effect of MID is to increase the relative spending on housing (the same with the myriad of landlord deductions including the accelerated depreciation allowance, which starts over every time the property is sold).

As anyone who's taken a course in public finance or tax policy can tell you there is a real cost to unpredictability in taxes, inducing private citizens to make particular investments and then removing the inducement is bad policy and bad politics.

I am all for a gradual reduction in the MID (and landlord accelerated depreciation). But the very serious blogger cluck-clucking over the issue is tedious and misguided.

Posted by: sfmandrew | November 16, 2010 9:18 PM | Report abuse

As luck would have it, I worked with CPAs for a few years.

I know why. I'll state the obvious:

The Golden Rule

The Man With the Gold, Makes the Rules

Surely, no one suspected that poor people crafted the tax code, right?

Just DON'T touch the Real Estate Tax Deduction, or I will have to eat cat food when I am old.

Go here for some Lie Dispelling Charts:
http://www.dailykos.com/story/2010/11/12/920112/-Bring-On-the-Charts:-Drown-the-Cat-Fd-Commission

and here

http://www.dailykos.com/story/2010/11/15/920711/-Tax-Cuts:Congress-Playing-Liars-Poker:-Robbers,-Liars,-Thieves

Posted by: VoiceofReason | November 16, 2010 10:42 PM | Report abuse

The mortgage interest deduction ceased being a middle class tax break in 1986, when the Tax Reform Act of 1986 substantially increased the standard deduction. My husband and I have not itemized our tax returns since then, because we don't have mortgage interest and property tax costs that exceed the standard deduction. Surely many, many other people are in the same situation. This means that the only people who CAN take the mortgage interest deduction are people who own expensive homes, and that pretty much excludes most of the middle class.

Posted by: scifiknitter | November 16, 2010 11:26 PM | Report abuse

at somepoint, second home [vacation home]mortgage interest became deductible; a boon doggle for the upper income folks. repeal this and the middle class folks will celebrate.

Primary residence McMansions support alot of people: builders, electricians, plumbers. Owners buy furniture, landscape their yards, install pools... and pay a higher proportion of property taxes

Posted by: CBenj | November 17, 2010 12:41 AM | Report abuse

scifiknitter is right. The standard deduction eliminates the home mortgage deduction for people who own modest homes. Most especially at the low interest rates that have prevailed in recent years. Capping the deduction will effectively eliminate it, which is not a bad thing.

Posted by: bgmma50 | November 17, 2010 1:33 AM | Report abuse

The problem is that people who live in high-income, high-home price, high-cost of living states are more likely to pay it and to feel like they aren't that rich. 38% of Marylanders take it; only 20% of people in low cost Texas do. You can see how the percentage paying it varies by state here: http://www.taxfoundation.org/publications/show/26341.html

Right now, most of those places are represented by Democrats (not least because Progressive growth management and zoning limit housing supply and drive up housing prices.) In Nancy Pelosi's San Francisco, the mortgage interest deduction really does feel like a middle class benefit, which is why she sees eliminating it as completely unacceptable.

Posted by: johnthacker | November 17, 2010 5:28 AM | Report abuse

"I'm pretty sure congressfolk want large subsidies to buy their houses. How many houses does McCain own??"

That doesn't matter. The deduction is limited to mortgages totaling $1 million from all your homes combined. That's part of why this affects the upper middle class and lower upper class more than the superrich. If you own four or five homes like the McCains or Kerrys, then you hit the limit on the deduction.

Posted by: johnthacker | November 17, 2010 5:30 AM | Report abuse

Hieronymous: "I always thought one of the reasons for such an exemption was to encourage people to buy homes, set down roots in a community, maybe start a family and become good citizens."

That may be the theory, but I've read that studies show other nations without the deduction don't have lower ownership rates than we do.

WEW72: "If not phased in over a long period, or balanced with lower overal tax rates (for all taxpayers, not just the non-"rich"), people are either going to suffer foreclosures or see their savings decimated from selling their houses at a loss."

Britain phased out its subsidy (over 12 years, I believe), apparently without disrupting its housing market.

The reason we're giving so much of the total benefits to upper-income groups? The real estate industry, the home construction industry--because the deduction inflates prices by making purchases more "affordable"--and homeowners, since removing the deduction would have an adverse effect on values.

But if we're serious about the long-term debt, this is precisely the kind of ill-targeted, wasteful subsidy we have to go after. Debt reduction isn't free, and those who are so concerned about it have to start putting their collective money where their mouths are. This subsidy is about $100 billion a year. At the very least, it needs to be restricted to those who might not buy a place otherwise.

I'm about to buy an apartment in Manhattan. I'd buy it anyway, but I'd like to thank all of you for subsidizing it for me!

Posted by: dasimon | November 17, 2010 5:59 PM | Report abuse

Hieronymous: "I always thought one of the reasons for such an exemption was to encourage people to buy homes, set down roots in a community, maybe start a family and become good citizens."

- I get tired of this argument. I didn't own a home until I was 40 because I was in the military and had to move every 2 years. Is this the type of freeloader "bad citizen" that we are trying to discourage through the tax code? What about the person that chooses to be a public school teacher in an expensive city. They might not be able to afford to buy a house. Why should this be discouraged as a socially dangerous lifestyle. Renting is not a sin.

Posted by: bkr07 | November 19, 2010 6:42 AM | Report abuse

Hopefully this gets read. I realize the graphs show a story here but from my experience an analyst can tell any story that he likes with the right graphs. To be of true value the analysis should be done on a regional basis and not on a national average. But from my point of view, which is just one voice I believe this would kill the already struggling housing market. Why would anyone purchase a home or any property is there were no tax benefit. For my part I could not even afford the house that I have without this benefit. I believe there are many more in that position also. So instead of helping the situation what we could see is another jump in foreclosures as more people who are just hanging on start to fall. No doubt in my mind if this were to pass my home is lost.

dp

Posted by: pitchd2008 | November 19, 2010 12:00 PM | Report abuse

Hopefully this gets read. I realize the graphs show a story here but from my experience an analyst can tell any story that he likes with the right graphs. To be of true value the analysis should be done on a regional basis and not on a national average. But from my point of view, which is just one voice I believe this would kill the already struggling housing market. Why would anyone purchase a home or any property is there were no tax benefit. For my part I could not even afford the house that I have without this benefit. I believe there are many more in that position also. So instead of helping the situation what we could see is another jump in foreclosures as more people who are just hanging on start to fall. No doubt in my mind if this were to pass my home is lost.

dp

Posted by: pitchd2008 | November 19, 2010 12:00 PM | Report abuse

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