Thursday, October 28, 2010

End the Mortgage Interest Deduction?

Last February, President Barack Obama appointed the National Commission on Fiscal Responsibility and Reform (Bowles-Simpson Commission).  Consisting of 18 members, the commission is supposed to report its recommendations to Congress for consideration by December 1, 2010.

To balance the budget in 2015, the commission needs to find $1.2 trillion in savings ($240 billion a year).  Potential big items are “tax expenditures,” that is, deductions from gross income.  Being discussed are the mortgage interest deduction and pretax payments of health-insurance premiums.  Reducing or eliminating the mortgage interest deduction and treating health insurance payments as taxable income would raise substantial revenue.

The housing and health insurance industries will fiercely lobby against these changes.  The housing industry will argue that reducing or ending the mortgage interest deduction will lower housing values by reducing the tax benefit of interest payments.  The evidence is questionable.  Moreover, the bulk of the benefit goes to upper-income households.

An international comparison of home ownership rates among 26 OECD economies places the U.S. 17th.  Most of those ranking above the U.S., including England, Australia, Canada, and England, do not permit deduction for mortgage interest.  Reducing or ending the mortgage interest deduction is not likely to have a large downward effect on housing values.  Indeed, one can argue that the mortgage interest deduction contributed to the subprime crisis by making ownership more attractive than renting.

I suggest we also end the tax-free treatment of employer-provided health insurance premiums, expand the expensing provision to all business investment, reduce the AMT to 19%, and apply the AMT to all taxpayers. In so doing, we will have largely made the transition to the flat tax.

(HT:  Mark Perry)


Chick said...

You'll need a transitional plan and a real world example for present mortgage holders.

Don in Seattle said...

Why does the government, when faced with a budget deficit, focus on ways to increase taxes rather than focusing on reduction in spending. All private individuals have to reduce spending when faced with a budget deficit. We have no choice. The government should do the same. Let's seen some real cuts in govermnet spending and then talk about increasing taxes.