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. ”
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.