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One of the Catfood Commission's big ideas is to get rid of the home mortgage deduction, and just lower income taxes for everyone.  This has a facile attractiveness, and the idea has been batted around before, but there's a bomb in there which wouldn't defuse easily.  

The deduction may well have been a bad idea, or at least not managed well, but the housing market is a fragile one.  Small changes in tax policy can have large repercussions.

The mortgage deduction is a two-edged sword.  On the good side, it has helped families afford homes.  On the bad side, it has helped inflate real estate bubbles, which we've seen to be hazardous to the economy.

If there had never been such a deduction, what would the consequences have been?  In a historical context, like the 1950s suburban building boom, it would have slowed down suburbanization a bit.  Houses would have been harder to afford, so more people would have stayed renters.  At the time, it would have looked worse:  Less economic growth, inferior housing (since the tax break is after all a subsidy to housing).  But we can look back and see the unforeseen consequences of suburbanization:  Sprawl, more dependence on the car, more racial segregation, inferior urban schools, and a general breakdown in community spirit.  

By the late 1970s, some people were moving back to the cities, leading to "gentrification".  Neighborhoods that had declined two decades earlier became fashionable again, and poor people who had moved in were displaced.  Since tax policy favored home ownership, apartments were sold off as condos, allowing home ownership (i.e., the tax deduction) without full land ownership.

So if it was a bad idea after all, maybe we should do away with it.  But what would happen then?

The housing market works very differently in different places.  In some parts of the country, land is cheap, and houses are priced based on how much it would cost to build one.  This is common in the area between the coasts, like from Ohio to Texas to Nevada, where there's plenty of buildable land.  Top locations might fetch a premium, but you can buy a 3BR house for <$250k.  </p>

In other areas, developed years ago, land is expensive, so the house itself represents only a fraction of the value.  My neighborhood near Boston, for instance, is rife with tear-downs.  It's typical for a 1500-2000 sf house to be purchased for around $700k, torn down, and replaced with a much bigger one (3500-4000 sf) that's marketed for around $2M.  These are for the top 1% -- the ones whose real income has dramatically risen over the past three decades.  And these houses are often purchased for cash, not mortgaged.  (About the only good thing about this trend lately is that since 2007, the new houses have been designed to blend in better -- they're just bigger Colonials.  From 1990 to 2007 or so, McMansions ruled, and it was a race to be even uglier than the last.)

What would happen if the mortgage deduction went away?  If it ended too quickly, people would have trouble paying, and defaults would lead to a mass of foreclosures.  Not good at all.  It's the rich who would benefit most from the Catfood Commission's proposed lower tax rate, so the middle class would be squeezed hardest.  In theory this could be alleviated by tweaking the tax tables.  But you and I know what could pass the incoming House.

Beyond that, home prices in general would fall, since the subsidy would be gone.  Now the real fun begins.  Put aside sub-primes for the moment.  Many homeowners have most of their family equity tied up in the house.  Let's say that the house price market were totally level since the house was bought (not a real case, but a simplification for math purposes).  If someone paid $500k for a house and put down 20%, then they have a $400k mortgage.  Absent the tax subsidy, there'd be less money chasing after houses.  In places where the value of a house is largely based on high demand for land, like the coastal cities, the price of a land, and thus a house, would rapidly fall.  A 20% drop would wipe out the homeowner's equity.  In places with cheap land, the price is closer to the cost of new construction, so it would probably fall less, but there's be even less new construction.

Because the high-land-price areas would lose equity more than the low-land-price areas, removing the tax break would effectively shift wealth towards the lower-cost areas.  Which just happen to mostly be red states.  Funny about that.

A lot of boomers were hoping to use home equity as part of their retirement savings, kids' college tuition, etc.  This would be lost.  Even if the deduction were phased out slowly, not immediately, the price of land would fall based upon the anticipated future demand.  The whole market dynamic would change.  The Catfood Commission accompanies this with cuts to Social Security and other programs that help middle-class retirees.  Are we detecting a pattern here?  The coupon-cutting class (the term refers to old-time bearer bonds, not store discount coupons) gets lower tax rates, while the mortgage-paying class loses their life savings and safety net.

To be sure, the mortgage deduction is a dangerous drug, and over time it probably should be phased down.  But any such change has to be very slow, and probably work its way down from the top income brackets, in a way that doesn't suddenly wipe out home equity and further damage the economy.  It will probably need decades to do correctly.  Otherwise it's an invitation to more financial disaster.

Originally posted to Frenzy. Illusion. Shadow. Fiction. on Thu Nov 11, 2010 at 10:08 AM PST.


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Comment Preferences

  •  A bit off topic FL Man Hit $900 overdraft fees (1+ / 0-)
    Recommended by:

    but, since you're writing about ways the middle class can get screwed...

    Did you know the financial "reform" Obama signed in July doesn't take affect until next year? I don't know when next year. It probably phased in over the next century and a half.

    Better late than never, you say. I don't think there's a good reason for any delay on legislation like this.

    If this doesn't bother anyone I don't think they really care in the first place.

  •  Thank you for the reasoned discussion of (1+ / 0-)
    Recommended by:


  •  Mort. exemption helps artificially inflate... (5+ / 0-)

    property values. All taxpayers compensate for it.

    And where's the equity for renters?

  •  I am not disputing (3+ / 0-)
    Recommended by:
    Roadbed Guy, greengemini, zbbrox

    your reasoning. However let's look to Canada which does not have a home mortgage deduction. Home ownership is approximately the same per capita as the US. There are ways around this within their tax code, but it is a bit convoluted. And where folks have gone through the hoops to get the deduction Canadian have about 70% equity in their homes as opposed to 45% equity here.

    However I do agree it would be tough and disruptive in the short term to un-ring this bell here.

    In the choice between changing ones mind and proving there's no need to do so, most people get busy on the proof.

    by jsfox on Thu Nov 11, 2010 at 10:18:01 AM PST

  •  Interesting diary (1+ / 0-)
    Recommended by:

    our mortgage was paid off several years ago so this does not affect us but still useful observations.

    "When in danger or in doubt, run in circles, scream and shout"

    by not4morewars on Thu Nov 11, 2010 at 10:19:10 AM PST

    •  Likewise (1+ / 0-)
      Recommended by:

      So where, diarist, is the selection in your poll for "I own a home and paid off the damned mortgage because I hate the idea of sending money to the banksters".

      I agree that an immediate elimination of the mortgage deduction might have an adverse impact. I emphasise 'might', because in the 10 years or so that I had a mortgage, the interest amount was never high enough to justify itemizing deductions.

      I don't see a social benefit in subsidizing exorbitantly expensive homes, so I agree that a phase-out should start with a cap on the total amount of interest that can be deducted, and then just keep lowering the cap. When it gets down to 75-80% of the "standard deduction", most people will stop using it.

      I am become Man, the destroyer of worlds

      by tle on Thu Nov 11, 2010 at 11:21:08 AM PST

      [ Parent ]

    •  It could impact you (0+ / 0-)

      If you want to sell the home, the price is impacted by the availability of the deduction to new buyers.  So you'd lose equity if it were done too fast.

      But if it were phased in more slowly than natural price increases, you'd keep your equity.

  •  A nice passage from an old NY Times article: (5+ / 0-)

    I had often heard my father rhapsodize about the G.I. Bill of Rights, which was enacted in 1944, when he was serving in the Pacific, and which a few years later was paying his tuition at law school; the mortgage-interest deduction came to be joined in my mind as an adjunct piece of social policy. One got you an education and the other got you a house: together, they bought entree to the middle class.

    Since the great migration to the suburbs also occurred after World War II, I assumed that the interest deduction was of a similar postwar vintage. Over the years, it has become an American folk legend: the government invented the mortgage-interest deduction to help people buy their own homes, and the level of homeownership has risen ever since.

    What part of the legend is true? Basically, none of it.

    Economists don't agree on much, but they do agree on this: the interest deduction doesn't do a thing for homeownership rates. If you eliminated the deduction tomorrow, America would have the same number of homeowners, the same social networks, the same number of gardens.

    The deduction might help some people (like me) to purchase bigger homes than they otherwise would. And it certainly helps people who are selling mansions to get a higher price. But it is hardly the democratic subsidy people think. In fact, it's patently regressive.

    More than 70 percent of tax filers don't get any benefit from the deduction at all. O.K., many of them are renters. But even among homeowners, only about half claim the deduction. And for the 37 million individuals and couples who do, the rewards, at least on average, are surprisingly modest — just under $2,000 per return. (Figure it like this: the median home, as computed by the Bureau of the Census in 2003, is valued at $140,000. If you finance 80 percent of it with a 6 percent mortgage, your interest bill is $6,720 a year. A taxpayer in the 25 percent bracket would save one quarter, or $1,680.)


    •  Yes, this is the only thing that makes sense (2+ / 0-)
      Recommended by:
      wayoutinthestix, greengemini

      People hear mortgage interest deduction and just assume that it benefits middle class people, when it basically benefits more affluent people at the same time it is grotesquely unfair to renters.  It makes the cost of housing go up -- it is almost certainly neutral on the rate of homeownership.

      I don't mind getting rid of these ridiculous deductions, but I vehemently object to tying them to a lower tax rate for the affluent people who take advantage of them. Just get rid of them.

      •  Without the mortgage interest break (0+ / 0-)

        rents go up. Rent goes up to cover the cost of doing business and increased taxation increases the cost of doing business.

        Newt 2012. Sociopath, adulterer, hypocrite, Republican.

        by tikkun on Thu Nov 11, 2010 at 10:56:05 AM PST

        [ Parent ]

    •  This struck me (1+ / 0-)
      Recommended by:

      And for the 37 million individuals and couples who do, the rewards, at least on average, are surprisingly modest — just under $2,000 per return. (Figure it like this: the median home, as computed by the Bureau of the Census in 2003, is valued at $140,000. If you finance 80 percent of it with a 6 percent mortgage, your interest bill is $6,720 a year. A taxpayer in the 25 percent bracket would save one quarter, or $1,680.)

      So 37 million homeowners live in their homes "rent free" a couple months of the year. I understand that seems inconsequential,err "modest" to the NYT,but many renters who would love that deal & likely many current homeowners need that cushion to stay in their homes.

      "George RR Martin is not your bitch" ~~ Neil Gaiman

      by tardis10 on Thu Nov 11, 2010 at 10:39:30 AM PST

      [ Parent ]

    •  Deduction effect (2+ / 0-)
      Recommended by:
      tikkun, greengemini

      I live in an area where the median house is more than twice the price cited in the article.  I also live in an area where the median household income would not fall in the 25% bracket.  We'll be hit harder because our credit is higher.  I pay 3x more in interest than the number cited.  

      So while it might not affect someone in the 25% bracket living in a $140,000 home much (and I'll argue that even then $1,680 is a big chunk for them) it does affect people in the middle class.  

      that's why I think it should be phased in and coupled with decreases in the rates so that the impact is hopefully offset.

      This is your world These are your people You can live for yourself today Or help build tomorrow for everyone -8.75, -8.00

      by DisNoir36 on Thu Nov 11, 2010 at 10:41:06 AM PST

      [ Parent ]

      •  Harder in high cost areas (0+ / 0-)

        What I don't  know, and what you ought to consider, is the extent to which the deduction leads to more expensive housing. It clearly does, but it's hard to say  how much, and to what extent especially where housing is expensive for other reasons.  

        Limiting the deduction to first time home buyers whatever the cost of their house (or limiting it to some fairly high amount) would be my compromise, which would definitely limit its scope but still help people like you.  

        •  The tax break doesn't lead to higher prices (0+ / 0-)

          Highly desirable areas with high amenities including better job markets and regional transportation make the price of housing go up. There is a point of no return but until that is reached, prices in areas with high amenities continue to rise with or without tax breaks.  

          The interesting thing about expensive areas is that the people one needs hire to do very basic work can't afford the housing prices in areas where their labor is likely to be most profitable and most consistent.

          Newt 2012. Sociopath, adulterer, hypocrite, Republican.

          by tikkun on Thu Nov 11, 2010 at 11:05:45 AM PST

          [ Parent ]

          •  It still raises prices (1+ / 0-)
            Recommended by:

            because the deduction makes more money available to bid on the most desirable properties.  A lot of people's housing budget is based on the mortgage payments that they can afford.  So without the tax break, people would bid lower prices, because they'd be able to afford less of a mortgage.

            This is less of a case where people are not "at the limit", but it is more common in high-cost areas, like greater Boston, where practically everything is expensive.

        •  I don't mid getting rid of it completely (1+ / 0-)
          Recommended by:

          However, it HAS TO be phased out.  The shock to real estate would be devastating.  Especially considering the fragile nature of the market now.  

          If it was packaged in a plan that would lower the tax rates that could work.  As the deductions were phased out the tax rates would be lowered.  Effectively one would cancel the other out.  At least that is in theory.  The reality is some people would be hurt while others would benefit.  

          One proposal being kicked around would be to start with mortgages over $500,000.  I don't think anything over $1 mil qualifies now for the deduction(although I could be wrong), so lowering that gradually to $500,000 on your primary residence would be a good starting point.

          I do agree with someone above that the deductions don't really lead to that much of a difference in prices.  Location really is the primary factor.  Proximity to NYC for example.  Specifically in CT there is a direct correlation between how long it takes to get to NYC and median prices.  The further out you go the lower the median prices.  Deductions may play a part but it's a very small part.  

          This is your world These are your people You can live for yourself today Or help build tomorrow for everyone -8.75, -8.00

          by DisNoir36 on Thu Nov 11, 2010 at 11:12:21 AM PST

          [ Parent ]

  •  Unserious proposal... (2+ / 0-)
    Recommended by:
    tjb22, Tam in CA

    It seems to be that eliminating the mortgage interest deduction is one of several unserious proposals included in this package.

    They are unserious because almost everyone seems to recognize that they are politically impossible - and are included in the package merely to impress on the public that the Commission considered a number of "radical" proposals.

  •  Why am I not Surprised that the Catfood (2+ / 0-)
    Recommended by:
    FuddGate, wayoutinthestix

    Commission did not recommend tax increases on the highest earners? Would that not also decrease the deficit? On the bright side, they say that catfood is more nutritious than most human food, though catfood doesn't taste as good. That's a trade-off...I guess.

    My back is spineless. My back is yellow. I am the American non-voter. -The Simpsons, Episode 2, Season 3, "Mr. Lisa Goes to Washington"

    by Aspe4 on Thu Nov 11, 2010 at 10:26:11 AM PST

    •  I dunno (1+ / 0-)
      Recommended by:

      The Wall Street Journal estimated that the tax proposals (a lower base rate combined with drastically reduced deductions) would double the taxes paid by John Kerry and his wife.

      While I don't particularly trust the Journal; if it's true that the Kerry's paid an effective Federal tax rate of 12.4%--meaning that they were able to shelter the vast majority of their income from the IRS--it's likely true that similar tax avoidance schemes (legal ones) are being employed by other wealthy individuals, many of whom are far less enlightened than the Kerrys.  A proposal which lowers the on-paper rate but which raises the effective rate is fine by me.

      But the devil is in the details.

      •  Divident and capital gains (0+ / 0-)

        In the Bush tax cuts, stock dividends were reclassified.  They're no longer regular income; they're taxed at a fixed, lower rate.  Likewise long-term capital gains, which used to be taxed based on 50% of the gain, but are now taxed at a single lower rate.  The very rich do not make their money in salaries, so raising the tax rate on normal income to 50% or 90% would do very little.  The hedge guys get "long term capital gains" assigned to them as income, as if they had held the stock for a long time.  The CEOs get options, which are turned to stock, which become long term gains.

        Unless the catfood folks want to do away with those deductions (I don't know their view), they're blowing smoke on raising revenues.

        •  This is an area where we should continue to fight (1+ / 0-)
          Recommended by:

          "Why should a working person's wages be taxed higher than someone's stock portfolio" is a good argument.  The only "good" answer essentially amounts to an admission that the wealthy enjoy greater economic and political power, and are thus entitled to a "volume discount"--that, and capital is more fungible than labor.

  •  Only on mortgages above $500,000 ? (2+ / 0-)
    Recommended by:
    tikkun, Tam in CA

    As usual it's very difficult to get actual news out of our media, but I have heard (and can't verify) that they're only talking about mortgages over $500,000 losing the deduction - in other words, high end borrowers. Anyone know if this is true?

    Either way, it's a dead issue, because whether or not it's a good idea, it will be HUGELY unpopular. It would be one of many ideas that, if implemented, would destroy Dem chances in the next election. Because this whole crap package has Obama's name slapped all over it, since he impanelled this stupid commission.

  •  Yes, this is true (0+ / 0-)


  •  Deduction doesn't do me any good. (3+ / 0-)
    Recommended by:
    raincrow, wayoutinthestix, erush1345

    Having a currently-unemployed spouse and filling jointly, my standard deduction eclipses what I'd get itemizing and taking the mortgage deduction.

    •  And this is true for most people (2+ / 0-)
      Recommended by:
      raincrow, erush1345

      Especially over time -- most people simply don't itemize and over time, the deduction is less and less valuable.  It's those who buy a new and bigger house ever 7 years that maximize the deduction.  

      •  Depends on where you live (2+ / 0-)
        Recommended by:
        raincrow, tardis10

        Out here in Orygun, we have no sales tax and relatively high property taxes--and real estate is still expensive compared to the rest of the country.  Itemizing makes quite a bit of sense for homeowners here; even ones who have traditional mortgages and a fair bit of equity in their homes.

  •  Since a "zero base" tax plan is being discussed (1+ / 0-)
    Recommended by:
    Tam in CA

    with various deductions added in...

    perhaps the mortgage interest deduction (and the property tax deduction as well) can be replaced with a general housing deduction/credit--or simply factor it in to the existing standardized deduction?  That way, renters and homeowners would be treated equally.  Such a thing would only apply to one's primary residence, and be limited in value.

    Of course, it might cause rents to go up, as tenants rather than landlords would be enjoying the tax advantages of rental property, which would have significant impact on the rental market.

    But it would certainly be more equitable.  

    (And one other question.  Is there any reason to favor homeowners who finance their homes vs those who pay cash, or whose homes have been paid for?)


    and, YES, i am SHOUTING!

    every time you use "catfood commission", you reinforce the republican point of view and embed that phrase in the american psyche!

    stop doing the republicans's work for them, damnit!!

    MOVE'EM UP! ROLL'EM OUT... MOVE'EM UP RAWHIDE!!! meeeoooow! mrraaarrr!! meeeOOOOOW!

    by edrie on Thu Nov 11, 2010 at 10:53:38 AM PST

    •  How is "catfood commission" a GOP talking point? (2+ / 0-)
      Recommended by:
      tikkun, raincrow

      It's a term of (ab)use that seems to be uniquely used by progressives, to protest (proposed) cuts to Social Security.  I don't see the right wing calling it the "catfood commission", ever.

      Unless you think that opposing cuts to FICA is now a GOP issue.  They did make it a big deal in the last election--but you can rest assured that they're only pandering to seniors for political advantage.  If there was a percentage for them in throwing grandma under the bus, then under the bus she'd go.

      •  Exactly (1+ / 0-)
        Recommended by:

        The term "catfood commission" is what the editors here normally use, so I picked it up from them.  It's a Kos term, not a rethug talking point at all.

        •  so repeating it and making it part of (0+ / 0-)

          the dialogue is okay by you?

          you missed my point.

          for every time a negative comment is repeated (over and over and over and over) - that framing sticks.

          perhaps you should read more of lakoff's excellent commmentaries on how "framing" works.

          every person here who repeats negative framing is solidifying that image with the public.  it should NEVER be our role to do so - not if we want to ever win an election again!


          i am amazed at how many people "just don't GET it"!

          MOVE'EM UP! ROLL'EM OUT... MOVE'EM UP RAWHIDE!!! meeeoooow! mrraaarrr!! meeeOOOOOW!

          by edrie on Thu Nov 11, 2010 at 11:48:01 AM PST

          [ Parent ]

      •  you haven't read the draft proposal. (0+ / 0-)

        i can tell by your inaccurate portrayal of what is in it.

        i just listened to a man being quoted by the msm - very negative and totally wrong.  but it "sounded" good, so they played it and will do so over and over again to shape the message.

        never mind that message is incorrect and inaccurate and slanted.

        by using such terms as "catfood commission", you are doing the exact same thing - helping the republicans in perpetuating the problem with the deficit by undercutting attempts to resolve it by presenting inaccurate information coming from a place of ignorance (like i said earlier, from your comments, it is obvious you haven't read the draft proposal just put out. if you had, you'd be discussing the elements instead of throwing out cute terms to describe that unread document.)

        i am SO tired of this opinion based (on lack of information) discussion around here.

        why not read the proposal and discuss the POINTS on merit or lack therein.  that is how to hold an intelligent discussion!

        damnit, you are an engineer - would you build a building without specifications based on a picture only?  USE your mind - USE your intelligence and have an intelligent discussion on this - lead the discussion, don't just repeat talking points!

        MOVE'EM UP! ROLL'EM OUT... MOVE'EM UP RAWHIDE!!! meeeoooow! mrraaarrr!! meeeOOOOOW!

        by edrie on Thu Nov 11, 2010 at 11:43:10 AM PST

        [ Parent ]

        •  Disagree (0+ / 0-)

          I think this is the best "bumpersticker meme" we have right now for characterizing the goals of the GOP and no-millionaire-left-behind Dems. Yes, it's a blunt instrument, and there are risks to trying to perform surgery with blunt instruments. So be it.

          •  so you want to perform that wonderful (0+ / 0-)

            surgical procedure known as "excising your nose to spite your face"?

            are you trying to help defeat the democratic party in the next election (JUST like was done in this past one?)

            you DO realize the consequences of that back ally surgery, don't you?  or do you even care what happens to this nation if the republicans take over?

            MOVE'EM UP! ROLL'EM OUT... MOVE'EM UP RAWHIDE!!! meeeoooow! mrraaarrr!! meeeOOOOOW!

            by edrie on Thu Nov 11, 2010 at 12:46:25 PM PST

            [ Parent ]

        •  I'm not defending the term as accurate... (0+ / 0-)

          personally, I think it's a bit hyperbolic myself.   But it's not a Republican term.

          The Republican framing of Social Security--when they're not pretending to defend it in order to pander to seniors--is that it's a socialist boondoggle which has been thorougly mismanaged and ought to be discontinued (often with the caveat that current retirees ought to continue to receive benefits, but us younger folk should be screwed over).  Either that, the trust fund given over to Wall Street to manage, in the public interest.

          The notion that little old ladies will be impoverished by cuts to social security and forced to eat cat food is a PROGRESSIVE framing of the debate.

          That's what I'm saying.

          Unless you believe in a Mancurian Candidate-theory in reverse--that the political left is a tool of the political right; confounding the two different sides of the political discourse isn't terribly productive.

  •  The mortgage deduction in a sense (0+ / 0-)

    phases itself out.  I'm only a few months short of paying off my mortgage.  The mortgage deduction hasn't been enough to make it worth itemizing my deductions on my taxes for several years now.  As to the Catfood Commission - we knew from the moment we got the list of people named to it what it was going to come back with.  Just some more ways to make the filthy rich filthier and richer at the expense of us soon-to-be peons.

  •  The real estate market is so screwed right now (1+ / 0-)
    Recommended by:

    that perhaps this isn't such a bad time to ditch this deduction -- seems it would be lost in the noise. If I were serious about buying a home, and if I had the down payment, I don't think I'd let the loss of this writeoff stop me.

  •  I'm not underwater but.... (0+ / 0-)

    It's harder and harder to stay afloat. My tax deduction on that mortgage means and meant more than the income tax deduction, rebate or much of anything else. I'd like it if they left it alone. IMO it's a good system and if it needs MENDING then so be it but don't end it.

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