Comments on: Weekly News Round-Up

By: susan.brady

susan.brady — Wed, 20 Aug 2008 21:42:08 +0000

Good explanations and good arguments. I knew I could count on you readers to help me make sense of this.

By: Colin

Colin — Wed, 20 Aug 2008 17:59:59 +0000

I don’t think there should be any tax deduction or credit at all. All the deduction does is effectively push up the amount of money a person can borrow. Couple this with the fact that the supply of houses is relatively inelastic, and the net effect is that it merely pushes up house prices as opposed to making them more affordable. Good for the banks (they get to lend more money) and good for long term home owners (who’ve seen property prices pushed up), but I really doubt it does much to increase affordability to new buyers. Of course, no politician will have the guts to phase this out. It’s essentially sacrosanct.

By: David

David — Wed, 20 Aug 2008 17:57:07 +0000

Yep, generally if you have higher income, you pay more in taxes, and so the mortgage interest deduction is “worth more” to you, also because you typically have a bigger mortgage.

Replacing it with a flat credit would eliminate this bias to subsidizing higher income folks and expensive R.E. areas, like California & NYC.

By: luckydogz

luckydogz — Wed, 20 Aug 2008 17:29:16 +0000

That argument is effectively advocating removing most deductions and moving it to credits. Better or not, who knows? It’s been debated both ways.

Anyways, if Person A is at a 25% marginal tax bracket and pays $10k in mortgage interest, that shields Person A from $2.5k of taxes. If Person B is at 10% marginal tax bracket, $10k in mortgage interest shields $1k. Generally, the Person at the 25% marginal tax bracket is richer – not always but generally. In this case, both people pay $10k in mortgage interest but one gets a bigger deduction. Of course, this is true of ALL deductions therefore, the argument would be to move most deductions (goodbye schedule A) to tax credits.

The assumption is that with a tax credit the same tax credit will be given regardless of the person’s marginal tax rate and therefore it’s the same for all. As a side note, this would help the AMT-stricken in that it could get around the AMT limitations.