[PEN-L:11505] Re: mortgage interest deduction

["Max B. Sawicky" <maxsaw@xxxxxxxxx>]

> From:          James Devine <jdevine@xxxxxxxxxxxxxxx>
> Subject:       [PEN-L:11500] mortgage interest deduction

> According to Joseph Pechman's FEDERAL TAX POLICY (1977: 289), the US
> Federal Income Tax exempted _all_ personal interest payments from taxation
> from the start of the modern income tax (1913). I guess the major interest
> group in favor of this would be the banking capitalists and kindred spirits.

(BTW, there are more recent editions of Pechman.)  The interest
deduction under the personal tax is distinct from a similar provision
on the corporate side.  It's not clear how important this was for
persons since as I noted the personal income tax did not become a
mass tax until WWII.

> Rather than being a policy that was instituted all at once, therefore, the
> mortgage tax deduction is a break that survived a series of tax hikes. I'm

Don't forget a rate hike can make the MI deduction more valuable
since it 'clears' taxable income subject to a higher marginal rate.

> pretty sure that it was in the 1980s that we stopped being able to deduct
> interest on car loans, etc. The upper middle and upper classes were able to
> resist the extension of this to mortgage interest.

It was the 1986 reform.  I think it is imprecise (not the
worst sin in the world) to depict this as an upper-middle
class thing since it affects the well-being of anyone who
owns a home.

> I still don't think that this tax break was any kind of deliberate effort
> to co-opt the working class. The bosses lucked into getting that result, to
> the extent that it actually happens.

A more interesting and grosser abuse flowing from the MI
deduction is tax arbitrage.  Investors are able to deduct
interest expenses under the personal income tax.  This
means you could borrow money (say, by taking a home
equity loan, or just getting a loan on some other collateral)
to buy stock, enjoy capital gains that is taxed at preferred
rates (soon to be 20%), but deduct your interest costs against income
subject to the top marginal rate (39.6) on "ordinary" income.
This would be even more lucrative if we had gotten indexation
of capital gains.  If we had better tax enforcement such practices
could be monitored and prevented, but at present there are no
appreciable obstacles.  Is this a great country or what?

Cheers,

Max



"People say I'm arrogant, but I know better."

                              -- John Sununu

===================================================
Max B. Sawicky            Economic Policy Institute
maxsaw@xxxxxxxxx          1660 L Street, NW
202-775-8810 (voice)      Ste. 1200
202-775-0819 (fax)        Washington, DC  20036
http://epn.org/sawicky

Opinions above do not necessarily reflect the views
of anyone associated with the Economic Policy
Institute other than this writer.
===================================================