This is a heavy subject that deserves a lot of discussion. I, unfortunately, have the attention span of a 3rd grader surrounded by Legos so an abbreviated analysis will have to do.
Interest deductions, in general, began in 1913. At this time, the majority of Americans paid upfront for their homes rather than financing so the deduction wasn’t highly utilized. The deduction, which included interest paid on personal loans and credit cards, was later revised in 1986 to exclude these items.
If you have been reading for a while, you should know that Miss Blinkin and I purchased our first home earlier this year. Here’s a breakdown of how the interest deduction would affect our finances:
Based on a loan amount of $250,000 / a marginal tax rate of 28% / an interest rate of 3.1%
|Year||Beginning Balance||Interest @ 3.10%||Payment||Ending Balance||Tax Savings|
As you’ll notice in the table above, the Mortgage Interest Tax Deduction would save us approximately $2150 in taxes the first year. The tax benefit would then decline each year given the amortization over 30 years.
The Chopping Block
In an attempt to slash away at our growing deficit and avoid the Bernanke-coined “Fiscal Cliff,” we risk losing this tax deduction. This possibility is met with mixed reviews (my commentary in italics).
Tax expert and Law Professor Edward Kleinbard says “we simply cannot afford wasteful government subsidy programs anymore, and this is one of the most important examples of that.”
We also can’t afford wasteful government spending. The subsidy program wouldn’t exist if the tax didn’t exist. The tax wouldn’t exist if the spending didn’t occur. Seems like there’s an easy solution to me.
Moody’s Chief Economist Mark Zandi disagrees by saying that “people account for it when they think about how much house they can afford to buy. You take that away, and house prices are going to weaken.”
Ummm…We just bought a house and not once did we consider the deduction when calculating how much house we could afford. Maybe this is Advanced Homebuying?
In March of this year, a bipartisan expert panel unanimously opposed the Mortgage Interest Deduction.
This panel included a Libertarian Economist…I’ll agree with whatever he thinks.
My favorite is the National Association of Realtors which claims that “housing is the engine that drives the economy, and to even mention reducing the tax benefits of homeownership could endanger property values.”
This extremely biased claim is incomplete. Housing is the engine that drove the economy…into the shitter. As a regular reader, you should already know that Homeownership is not the American Dream.
If you were to ask me if the deduction will stay or go, I would have to say “I don’t know.” It’s impossible to see the future. All I know is that no politician wants to vote for anything that could hurt their chances of being reelected.