Archives for April 20, 2011

I bought a house in 1997, then bought it again after my divorce. Well, I bought it in the sense that I put down money I borrowed from a lender. Given that houses are incredibly expensive, this is how most folks buy them. After I bought my house for the first time, I found that I could (as promised) deduct my mortgage interest from my taxes. This seemed like a good idea at the time.

After I re-bought my house, my interest was not high enough to give me any tax savings. As such, I found the mortgage deduction somewhat less appealing. However, I am quite capable of recognizing that what might not benefit me might actually be good and important for others.

However, as the federal deficit looms ever larger, I wondered about the mortgage deduction once again. On the face of it, it can seem to be a good idea. After all, it gives people a break on their taxes when they buy a house. This can, no doubt, be a help to many people. In fact, I have friends who are routinely saved by this deduction every year.

However, a little thought about the mortgage deduction does lead to some concerns.

First, the deduction is not a fixed amount but rather varies with the amount of the mortgage. This means that the larger the mortgage, the larger the break for the taxpayer. So, for example, someone who has a mortgage for a $7 million house will be getting a far larger deduction than someone who has a mortgage for a $72,000 house. On the face of it, that might seem to be fair. After all, someone with a $7 million mortgage is paying out much more than someone with a $72,000 mortgage. However, this does mean that the more expensive your house is, the more you will be able to take off your taxes-thus rewarding those who have more with more savings.

Second, there is the obvious concern that the mortgage deduction is a tax break. This means that taxpayers (or China) are helping to subsidize the buying of houses. Given that the deduction (usually) increases with the size of mortgage, this means that the more expensive the house, the greater the subsidy provided by the taxpayer. As such, the wealthy will generally benefit from this far more than less wealthy homeowners. Those who do not own houses do not benefit at all from this and these people will generally tend to be less well off than home owners. As such, this seems to be a benefit for the more well off paid for by the lower (or non-existent) deductions allowed to those less well off. In any case, this seems to be an entitlement plan for those who are well off enough to buy a house and it gets better the more expensive the house. This does raise an obvious moral concern about subsidizing the haves and have mores on the backs of the have nots and the have less.

Third, this government subsidy of housing has had exactly the sort of impact that conservatives love to point to as a reason to cut government entitlements: it seems to have helped expand the cost of houses by allowing consumers to spend more via the support of the government (in this case, by making more money available by lowering the tax payment). It also seems to have provided at least some motivation for people to accept large mortgages that probably should have been considered beyond their finances. After all, if someone knows that a big mortgage means significant tax savings, they might be more inclined to overspend.

There are, no doubt, some good reasons for the mortgage deduction. However, it does seem unfair to allow people to pay less taxes by the clever means of spending more on their house. After all, why should other people pay more so that someone else can have a bigger house?