Deduction of Mortgage Interest Crippled Our Economy

Friday, 05 Oct 2012 08:12 AM

By Barry Elias

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The most recent report by Congress’ Joint Committee on Taxation suggests that the U.S. Treasury foregoes approximately $1 trillion in tax revenue due to income deductions. The mortgage interest deduction is the third largest item after employer healthcare expenditures and reduced tax rates on dividends and capital gains.

In 2011, the lost tax revenue due to the mortgage interest deduction was $77.6 billion — with $35 billion to those with annual incomes between $100,000 and $200,000 and $29 billion to those with annual incomes above $200,000. Therefore, 85 percent of the benefits went to those earning over $100,000 annually, twice the median family income.

According to the Internal Revenue Service publication 936, the amount of mortgage interest that can be deducted is unlimited if the mortgage was obtained on or before Oct. 13, 1987. After this date, all mortgage interest may be deducted for loans of $1 million or less. At the current rate of roughly 4 percent, this translates to a maximum deduction of $40,000 in mortgage interest for a mortgage issued today.

Alert: End of America's Middle Class a Startling Reality. Read More Here.

This deduction would appear to be in place as an incentive to invest, create jobs and increase income. However, this does not seem to be the case — it tends to favor the purchaser much more than it does society. While the purchaser might require expenditures over time to maintain and improve the property, it is far less than that of a business, which produces much more product over many years, thereby generating greater employment and income.

Moreover, the increase in mortgage demand translated to an excessive rise in mortgage-backed securities (derivative products) — the nucleus of the financial implosion. The repeal of Glass-Steagall and derivative deregulation during the late 1990s further enabled these extraordinary excesses of undercapitalized debt and credit formation.

In 1980, the derivatives market was virtually non-existent. By 2010, this market grew to more than $1 quadrillion ($1,000 trillion), or 20 times the global economy. Reducing the mortgage interest deduction would facilitate a return to economic and financial normalcy.

Alert: End of America's Middle Class a Startling Reality. Read More Here.

(Revised Oct. 8, 2012)

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