S’Thievin Stetson and the Mortgage Interest Deduction

10403247_818327637918_449473574942174590_nMy wife and I recently closed on our new home in Holyoke, and we couldn’t be happier. We had been wanting to purchase a home for a long time, for a variety of reasons:

  1. I am a firm believer in the notion of building equity rather than paying rent.
  2. We were tired of the annual rent increase haggling with our landlord.
  3. We couldn’t really personalize our living space, since it wasn’t ours.
  4. Owning a home makes me feel more invested in a community, which as a civically engaged kind of guy, is important to me.

And on and on. But the biggest reason to buy a home for many is strictly monetary – we can now deduct our mortgage interest from our federal income taxes. On top of that, we can deduct municipal property tax from our federal income taxes. All told, according to a tax calculator I used at bankrate.com, we’re going to end up saving over $1,200 per year on our federal taxes on average for the next 30 years.

Wait, what?

Introducting S’Thievin Stetson

robin hood
Source: A.V. Club

We in the Anglo-American tradition tend to venerate the figure of Robin Hood, who stole from the rich and gave to the poor. This is reflected in our income tax policy, which progressively taxes higher incomes more than lower incomes. Well, I want to introduce “S’Thievin Stetson”, Robin Hood’s alter ego. S’Thievin inspired the Mortgage Interest Deduction (MID), one of America’s most regressive, costly, and (unfortunately) sacrosanct tax policies.

The MID was codified into the beast that it is today in the 1986 tax reforms that eliminated many specific deductions and exemptions, in addition to lowering the overall tax rate. For whatever reason, the MID survived those reforms. Today, the deduction costs American taxpayers over $70 billion per year in lost tax revenue, with the majority of the benefit going to households making over $100,000 per year.

regressive tax policy
Source: Center on Budget and Policy Priorities

The argument in favor of the MID most commonly used is that home ownership is a fundamentally good thing that we as a society should be supporting. It encourages community cohesion, promotes investment in the built environment of the town, and is a tool for investing wealth into a stable market (er… forget about that period between 2008 – 2010).

Except that research has shown other countries, like Canada, have similar home ownership rates without the MID. Whoops!

The Political Third Rail

So why do we have it? And why is it so sacred?

I suspect it has to do with who benefits: a whole lot of upper-middle class households.

income bracket
Source: The Atlantic

Much of the current political debate has to do with the 99% versus the 1%. Sure, that seems cut and dry enough. But what about when it’s the 80% versus the 20%? And what does it mean if that 20% produces many of the elected leaders who ultimately make these policy decisions?

I suspect that the MID is going to continue being a “political third rail” (ie touch it and die). Brookings proposed an interesting solution that would seek to shift some of the benefit away from the very wealthy and toward the middle class, but I doubt anything will come of it in the current federal political atmosphere. That doesn’t mean we shouldn’t try anyway.

Why You Should Care

Ultimately, this matters because when the wealthy pay less in taxes, the rest of us have to pay more. When a household making $200,000 decides to buy a home for $750,000, the renters making $40,000 have to pick up the slack in the federal balance sheet. Medicare, Medicaid, Social Security, roads and highways, education – all of these public goods fall increasingly on the backs of those less able to shoulder the burden.

Put differently, renters in Holyoke are subsidizing home owners in Longmeadow. That just doesn’t seem right. Lousy S’Thievin.

 

 

 

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