As budget hawks circle, the existential threat to the mortgage interest deduction for homeowners continues to grow.
The tax break, which allows for a reduction in taxable income equal to the amount of interest paid on a home loan, is purported to cost the federal government $100 billion a year.
Last November, President Obama’s deficit commission recommended eliminating the deduction for second homes and home equity loans, and decreasing the size limit for eligible homes.
The proposal died in committee, but proponents of the tax break might now be wishing the compromise had passed.
Today, Rober Pozen of the Financial Times called for Congress to revisit the deficit commission recommedations, but he didn’t stop there. Pozen also questioned the tax break’s raison d’etre; that the incentive encourages middle class home ownership.
Pozen argues as follows:
1) The MID is not available in countries with similar housing markets (Australia, Canada and England), and all three of those countries have a higher rate of home ownership than the United States.
2) This study concludes that the MID actually has a negative effect on home ownership in metropolitan markets with a low supply of housing, as increased demand due to the MID raises the price of homes beyond the reach of the middle class.
3) The MID only increases home ownership for the highest earners, as it’s only available to taxpayers who itemize deductions. The MID is also worth more to taxpayers in the highest income brackets.
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