Consumers, Economists See MID Differently

There are academics and there are consumers, and on the topic of whether the mortgage interest deduction should be modified as the federal government looks for ways to shrink its budget deficit, the opinions couldn’t be more divergent. Consumers are for preserving MID, because it’s one of the middle class’s key incentives for wealth-building. Academics? Not so much. To them, MID should be on the budget-cutting table.

That’s pretty much how the views divided up on The Diane Rehm Show yesterday morning, which brought together a handful of economists to look at MID in the context of the fiscal-cliff debate going on in Washington.

Among the economists, Seth Hanlon of the Center for American Progress, Eric Toder of the Urban-Brookings Tax Policy Center, and Ed Pinto of the American Enterprise Institute, said some type of phase-down or overall cap on all itemized deductions should be looked at. The lone defender of MID, NAR Chief Economist Lawrence Yun, said in the real world, the deduction is not and has never been the answer to the country’s economic woes. MID has not only been in place over the last 99 years as the U.S. became an economic superpower, but it has become so important to the middle class that tinkering with it, especially now, could greatly destabilize the economy.

“Some economists argue that the mortgage interest deduction is holding back economic growth,” Yun said on the popular radio show, which airs on WAMU 88.5 FM and is nationally distributed by NPR. “I would argue the other way, that homeownership provides incentive for people to work hard when thinking the long-term vision.”

The lion’s share of about a dozen callers to the show agreed with Yun. One said he’d moved to this country and worked for eight years to be able to afford a home and to take advantage of the mortgage interest deduction.

MID “was meant to give people a chance and opportunity to have some liquefiable asset in case they get into a financial disaster later on,” said another caller.

Toder of the Urban-Brookings Center says MID shoud be transitioned over a 10-year period from a deduction to a flat credit. “With a credit, if you have $1,000 of mortgage interest and we have an 18 percent credit in our plan, you’re going to get $180 no matter—of savings directly—no matter what your tax bracket is. So it’s just better targeted at people of all tax brackets.”

But Pinto of AEI says the credit isn’t much of a better idea than the deduction. “it’s going to distort housing once again, and we’ve been distorting housing all too much, particularly home ownership,” he said, claiming that today’s standardized deduction, which households can take on their tax return without itemizing, is enough to cover the interest on most household’s mortgage. In his statement, Pinto didn’t account for the deduction home owners can take for property taxes.

The economists challenging MID pointed to the experience in England, which phased out their version of the mortgage interest deduction over many years, and saw little effect on home values over time. But Yun said that the comparison is misleading, because England had an acute shortage of market housing and values would have gone up no matter what simply on the basis of supply and demand. “Housing start activity in England was much lower in proportionately compared to the U.S.,” Yun said. It “was just a supply restriction that occurred in England.” On the show’s Web site, a listener who’d lived in England for 10 years and owned a home there agreed that the comparison was spurious.

One of the last callers on the show summed up consumers’ concerns, saying the phasing out of MID just looks at one side of the debate budget and misses the impact it will have on the middle class. “You’re doing everything right, saving for college, paying life insurance, etc., you start phasing out your tax benefits,” he said. “You’re absolutely killing the middle class. . . . You can’t—it just—you can’t look at one side of the ledger. ”

Listen to the show now.

Learn more about the federal government’s fiscal-cliff debate and possible impacts of making changes to MID as a deficit-cutting measure in a REALTOR® Magazine video released yesterday with NAR Chief Economist Lawrence Yun and NAR economist Danielle Hale.

Robert Freedman

Robert Freedman is director of multimedia communications for the NATIONAL ASSOCIATION OF REALTORS®. He can be reached at

More Posts

  1. Joseph Lolli, CCIM

    Instead of quibbling over the MID, how about scrapping the entire tax code and replacing it with the FairTax?

    Sure your mortgage deduction goes away, but then, so does the entire income tax code! The fact is that even though the FairTax makes the MID irrelevant, housing is not only more affordable but homebuyers will have more money with which to purchase their home.

    There are several reasons for this:
    • Most home sales are of existing homes, and unlike today, taxpayers can use untaxed earnings to buy existing homes.
    • Unlike the current tax code, the FairTax does not tax the earnings used to pay mortgage interest. Even if the MID offset 100% of income taxes, interest would still be paid with what the taxpayer has left over after payroll taxes are deducted.
    • Mortgage debt will be paid at a lower interest rate since the FairTax lowers the interest rate of such debt.
    • While the sale of a new home is taxed, the FairTax imposes a lower marginal rate of tax on the earnings used to buy that home. In addition, The FairTax removes all “embedded” tax costs of current construction by untaxing the businesses involved in home construction and producing building supplies. That reduces the price of a new home.
    • Unlike the current tax code, the FairTax fully untaxes capital gains from the sales of used or new property.
    • The FairTax enables homeowners to save for a home faster by not taxing savings, unlike today.
    • The FairTax improves the economy and increases national income by removing the drag the current system imposes on economic growth.
    • The FairTax currently has almost SEVEN DOZEN congressional cosponsors of HR-25 / S-13 while the closest competing tax reform bill, HR-1040, has only 10 congressional cosponsors in the House.

    The FairTax shifts tax decisions away from Congress. There is no role for tax lobbyists or policy experts (no exemptions or gimmicks to sell) and just like NAR’s lobbyists they have reacted by poo-poo the idea because without a complex tax code, there is no longer a reason to employ high priced lobbyists to “protect” your industry’s favorable tax treatment. Besides, if you are a broker or agent, you are probably self-employed and pay both sides of FICA taxes (13.5% today, 15.3% after 1Jan13). What if you didn’t have to pay income OR employment tax? With the FairTax, you would net more income by charging a 4% commission than you do now by charging your client a 6% commission. As Obama says, “Do the math”… Your combined income and employment taxes can easily exceed the discounted commission price. So what does that mean in the market? Lower prices to the consumer means a larger universe of homebuyers! And more $$$ in your pocket!

    Sure, sure, sure I know that the NAR lobbyists wants to preserve the MID, but what they are really saying is that they want to preserve their jobs!

    Okay, so let folks keep their MID… but the FairTax will take away the income tax from which to deduct the MID. So which would you rather have? A discount coupon (MID) for a lower tax? Or have no tax at all? Hey, this ain’t rocket science folks. States have been charging sales taxes since before Lassie was a puppy! So check this out! Google and read all about it.

  2. I support the Fair Tax because I think it is the only thing that will put us on the right track for the long term financial health of this nation.
    It treats all people equally, it takes power and influence away from lobbyists, and it devolves power from Washington, which is why, unfortunately, that I believe it will not be passed anytime soon.