But the mortgage crisis also reveals the dark underbelly of the mortgage interest deduction. For one thing, it disproportionately benefits high-income earners who buy expensive homes. In 2003, taxpayers with incomes over $75,000 filed 16 percent of all tax returns yet accounted for 54 percent of the deduction's total tax savings; the 52 percent with incomes under $30,000 claimed just 9 percent of the tax savings.
This tax benefit also encourages people to buy a bigger house than they otherwise might afford. Indeed, because the deduction applies regardless of whether the borrower pays a high or low interest rate, makes a big or small down payment, or pays down principal monthly or opts for an interest-only loan, the mortgage deduction has the perverse incentive of rewarding higher-interest, lower-down-payment and interest-only loans - precisely the sorts of loans that got many Americans in trouble in the first place.
The worst legislation often has two fathers: misinformed, but well intentioned do-gooders and special interests. The home mortgage interest deduction is a clear example of this. Do-gooders want to do everything they can to encourage home ownership, and the mortgage lenders and residential homebuilders are happy to reap the benefits of such ill-conceived ideas as deductible home interest. Baptists and bootleggers.
3 comments:
FM - I think that's an interesting way of looking at it, but I can't quite agree 100% with you on your pespective or the article writer's perspective. If I am misunderstanding the point, accept my apology in advance.
It is true that a more expensive house, or a mortgage with a higher finance rate would both enable someone to have a bigger tax write off, but there's more to this than the up-front numbers. Tax write offs are not the same as tax refunds. If I claim $1000 in write offs, my tax debt is only reduced by (approx.) $300 (depends on my income bracket). I don't get a 1:1 rate of return on the write off.
If people are actually buying a bigger house or purposely accepting a loan with a higher rate just to get a bigger tax write off, that makes no sense. Thay are essentially a lot more in expenditures to a get little more back in taxes. A bad "investment" strategy in my opinion.
Similarly, I know of people who actually want to keep a mortgage as long as possible so they have a tax write off. Again, this makes no sense to me since you don't get a 1:1 return. If I could afford to pay off my mortgage early, and lose that tax write off, I would. The money I could save each month by not having to make a mortgage payment at all far outweighs the loss of my tax write off benefit.
The point is this: assuming you have a marginal tax rate of around 30%, an additional dollar in mortage interest expense only costs you 70 cents. The mortgage interest deduction essentially gives everyone a 30% off sale on their mortgage rate. Lowering the price of something causes people to consume more of it, which played a role in the mortgage crisis.
It actually does make sense to hold a mortgage as long as possible if you can get a higher return on your money elsewhere. Why pay off a 5% mortgage early when you can invest in the stock market and get 10% over the long haul? I know, that is not a good argument with the performace of the stock market as of late :-)
I do agree with your last thought about an investment that might have a better rate of return than the mortgage rate. I knew I had forgot something in my take on this.
I doubly agree that there are few investments these days offering a 5% rate of return. I'd be happy with 1%, or anything better than the -15% I've been hit with over the last year. COL (cry out loud)!
Post a Comment