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Old 07-24-2017, 01:00 PM
 
Location: Paranoid State
12,685 posts, read 9,425,981 times
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Do People Respond to the Mortgage Interest Deduction?

According to findings of a new NBER working paper, the mortgage interest deduction does nothing to promote homeownership, a finding that undermines one of the core justifications for the tax break.

Letting taxpayers deduct mortgage interest encourages them to buy bigger homes and more expensive homes – but it doesn’t change that fundamental decision about whether to buy in the first place.

“Over multiple time periods, and considering multiple empirical strategies, we find no effect of the tax policy change on whether households own or rent,” wrote the authors, Jonathan Gruber of the Massachusetts Institute of Technology, Henrik Kleven of Princeton University and Amalie Jensen of the University of Copenhagen.

http://papers.nber.org/tmp/16428-w23600.pdf

Do People Respond to the Mortage Interest Deduction? Quasi-Experimental Evidence from Denmark

The quantitative data used are from Denmark.

Here's the abstract:

Quote:
Using linked housing and tax records from Denmark combined with a major reform of the mortgage interest deduction in the late 1980s, we carry out the first comprehensive long-term study of how tax subsidies affect housing decisions. The reform introduced a large and sharp reduction in the mortgage deduction for top-rate taxpayers, while reducing it much less or not at all for lower-rate taxpayers. We present three main findings...These findings suggest that the mortgage interest deduction distorts the behavior of homeowners
at the intensive margin, but is ineffective at promoting homeownership at the extensive margin and any externalities that may be associated with it.
“I really view this as putting a nail in the coffin of the idea that this tax break affects homeownership,” MIT's Gruber said in an interview Monday. "If policy makers wanted a tax break to promote homeownership, a tax credit for first-time homebuyers or a deduction capped in line with median regional home prices would be more effective than the current rules," he said.

The mortgage interest deduction – only available to the roughly 30% of households that itemize their deductions – will reduce government tax collections by $72.4 billion in fiscal 2018, according to the congressional Joint Committee on Taxation.

Perhaps it really is time to get rid of the mortgage interest deduction as a loophole that has outlived its purpose.

Last edited by toosie; 07-24-2017 at 06:31 PM.. Reason: TOS - copyright - just a link and a few sentences quoted please
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Old 07-24-2017, 01:49 PM
 
961 posts, read 921,475 times
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I'd be in favor of a step-down phase-out to limit the consequences of removing such a tax deduction. I would assume this would take a hit to real estate prices (which is not necessarily a bad thing), and perhaps there will be a small decline in real estate transactions for the short term. The tax deduction did not factor into our decision to buy a house. Instead, the main reasons for us choosing to buy a house was to stabilize our housing costs, allows us to have pets, allows us to have more space and a guest room, and allows us to customize our home. We viewed the mortgage interest tax deduction as a wash when you consider the added property taxes we pay. I guess that takes from the federal revenue and gives it to local government.
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Old 07-24-2017, 01:56 PM
 
17,624 posts, read 12,203,533 times
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The removal of the deduction would disproportionately impact higher income/more expensive houses generally speaking. I'm not really against the idea
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Old 07-24-2017, 02:28 PM
 
Location: Paranoid State
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Very abrupt transitions cause shock waves that are sometimes difficult to forecast. Cap and step down & phase out could help.
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Old 07-24-2017, 02:42 PM
 
18,253 posts, read 11,653,926 times
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Quote:
Originally Posted by SportyandMisty View Post
Very abrupt transitions cause shock waves that are sometimes difficult to forecast. Cap and step down & phase out could help.

Just end the thing for primary residences purchased after a certain date; period end of story.


Second homes and yachts can loose their interest deductions soon as ink is dry after signing IMHO.


Study after study for decades have reached the same conclusion; the mortgage interest deduction does *nothing* for simulating home buying in USA overall. More so after successive tax overhauls have raised the standard deduction. Other countries manage to do without MID and yet have roughly same homeownership rates as the United States.


MID benefits a small number of taxpayers in a few states, none of whom would suffer serious financial ruin or reversal if the thing ended.
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Old 07-24-2017, 05:06 PM
 
4,229 posts, read 1,905,340 times
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If the HMI deduction did not already exist, few today would be advocating to create one. The problem is that it does already exist, and it is all but inextricably woven into the fabric of current real estate markets.
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Old 07-24-2017, 05:52 PM
 
Location: Paranoid State
12,685 posts, read 9,425,981 times
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Quote:
Originally Posted by Pub-911 View Post
If the HMI deduction did not already exist, few today would be advocating to create one. The problem is that it does already exist, and it is all but inextricably woven into the fabric of current real estate markets.
Yes, it is a cancer. I wouldn't say inextricably woven -- like other cancers, it can be cut out.

Gruber isn't the sharpest tool in the shed, but he got this one right.
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Old 07-24-2017, 05:59 PM
 
Location: Denver CO
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well, it's not like there are any real differences between the US and Denmark, after all, so no problem extrapolating the results from a different country with vastly different demographics and economy.
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Old 07-24-2017, 07:13 PM
 
4,229 posts, read 1,905,340 times
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Quote:
Originally Posted by SportyandMisty View Post
Yes, it is a cancer.
A cancer? Like many others, the HMI deduction is simply a tax incentive to support activity that Congress has long deemed important to advancing and maintaining a sound and well-grounded society.

Quote:
Originally Posted by SportyandMisty View Post
I wouldn't say inextricably woven...
Hmmm. Where are all the good plans for getting rid of it?
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Old 07-24-2017, 07:52 PM
 
2,953 posts, read 1,389,796 times
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Quote:
Originally Posted by Lowexpectations View Post
The removal of the deduction would disproportionately impact higher income/more expensive houses generally speaking. I'm not really against the idea
Maybe it would reduce the demand for luxury housing? But having a higher income we can NOT take the deduction per our CPA. So we paid cash for our house.

Actually, if you do the math, you don't get a dollar for dollar write off. And the highr your income the less you can write off till you make too much and can write off nothing.
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