Richard Rubin of the Wall Street Journal tweeted this quote from Doug Holtz-Eakin this week.
I assumed that Holtz-Eakin wasn’t talking about the tax provisions that allow businesses to deduct their business costs from their tax base, such as accelerated depreciation, or the ones that are meant avoid the double taxation of income, such as the deferral of taxes on non-repatriated business income earned (and taxed) overseas.
On the other hand, that quote made me think of the furor from the real-estate industry to the announcement that the Republicans’ tax framework plans to double the standard deduction. Why? Because while the mortgage-interest deduction was preserved in the plan, it would mean fewer taxpayers using the deduction. The Wall Street Journal reported this a few days ago:
One goal of the GOP framework is to simplify the tax code by eliminating preferences that distort economic behavior. Most itemized deductions other than mortgage interest and charitable contributions would be nixed. But the individual standard deduction would increase to $12,000 from $6,350 ($24,000 for married couples) to reduce taxes for most Americans.
The Realtors are upset because they say this middle-class tax cut would make fewer taxpayers use the mortgage-interest deduction. The National Association of Realtors trashed the framework in a statement, saying it “would all but nullify the incentive to purchase a home for most, amounting to a de facto tax increase” and ensure “that only the top 5 percent of Americans have have the opportunity to benefit from the mortgage interest deduction.”
There is so much wrong there that I don’t know where to start. First, notice the entitlement mentality on display here. It is true that for years government has taken it upon itself to prop up homeownership — with various degrees of success. Yet that doesn’t mean that this is a good idea or even within the proper scope of the role of government. So to the extent that the framework removes some of these distortions, it is a good thing.
Moving to a system where fewer people itemize is also a good thing. Tax simplification doesn’t simply bring more fairness to the tax code — it increases efficiency, and it saves taxpayers money and time by reducing their compliance costs.
Third, this quote implies that everyone benefits today and that losing this deduction would mean higher taxes for taxpayers. Wrong. Today, roughly a third of taxpayers itemize and claim the deduction. From MarketWatch:
In 2018, 35.4 million households are expected to claim itemized deductions for mortgage interest, according to a study released in May by the National Association of Realtors and auditing firm PwC. Comparatively, the report estimated that 40.7 million taxpayers will report itemized deductions in 2018 for property taxes. (The U.S. Census Bureau estimates that there are roughly 117 million households in the U.S., which would mean that just under a third claim the mortgage interest deduction).
This is a good read, too. Research has shown that the mortgage-interest deduction mostly benefits higher-income earners. This is from Mark Calabria back in January 2017 (he was at the White House):
Fully 75 percent of federal dollars — including tax expenditures — used to subsidize housing goes to high-income households through the mortgage interest deduction and other homeownership tax benefits. Seven million households with incomes of $200,000 or more receive a larger share of these resources than the 55 million households with incomes of $50,000 or less, even though lower-income families are far more likely to struggle to afford housing. Half of all homeowners receive no tax benefit from the mortgage interest deduction, and almost all of the tax break goes to households with incomes above $100,000. At the same time, only one in four of the poorest households that are eligible for housing assistance get the help they need because of chronic underfunding.
In addition, like most subsidies, the mortgage-interest deduction artificially inflates the price of homes. That means that homeowners don’t really benefit from it because, though they do sell their homes at higher prices than they would be worth without the subsidy, they also have to buy over-priced homes.
And as Jeff Dorman explains in this piece over at Forbes, the claims that the deduction, by encouraging homeownership, has a positive impact on the economy is dubious:
Yet, thanks to a new study out based on Danish data, many people are now wondering if there is anything positive about this tax break. While the debate is not settled, right now the answer appears to be no. The mortgage interest deduction is nothing more than rent seeking on behalf of the real estate industry. It confers no benefit to society as a whole.
What the new study by economists Jonathan Gruber, Amalie Jensen, and Henrik Kleven showed, at least in Denmark, is that the mortgage interest deduction did not boost home ownership rates, only prices and the amount of money that people borrowed when they bought houses. The official rationale for a tax code that favors debt related to houses is that home ownership creates benefits to society because it makes people feel more invested in their communities and should thus be encouraged. If the mortgage interest deduction only increases mortgage debt and home prices, not home ownership, then it is a failed policy and its repeal should be considered.
At the same time, the tax break doesn’t seem to incentivize homeownership a whole lot. Government data show that the homeownership rate in Canada (69%) is actually slightly higher than in the U.S. (63.7%), despite the fact that the Canadian tax code doesn’t include any deduction for mortgage interest paid. And rental households obviously don’t see the tax benefit, since they don’t have access to it. “It’s not clear that the U.S. has had a boon of homeownership because of the mortgage interest tax deduction,” Chacón said.
These results are consistent with the findings of many other studies, such as this one by my colleagues Jason Fichtner and Jacob Feldman. See this very recent study’s findings:
We simulate the effect of tax reform on the housing market. Eliminating the mortgage interest deduction causes house prices to decline, increases homeownership, decreases mortgage debt, and improves welfare. Our findings challenge the widely held view that repealing the preferential tax treatment of mortgages would depress homeownership.
There is so much more out there on the issue. While I have my issues with the doubling of the standard deduction (mostly I don’t like that it kicks more people off the tax rolls), I recognize that it will bring very needed simplification to the tax code. The furor of the real-estate lobby is evidence of that. Their criticism should be ignored for the benefit of all.