If tax write-off was reversed, what would happen to the economy?

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Submitted by Alex_angel on August 1, 2007 - 6:56am

About 4-5 years ago I read an article where the Feds reported the top money losers that they have. In the list was the tax write-offs for mortgage interest. It was in the hundred of billions. The article said that the tax write-off was introduced in the 80's to help spur a really poor real estate market and was only a temporary measure. The article went on to mention that it was debated a while ago to remove this write-off, but of course no one was crazy enough to vote against it.

I just can only imagine the damage something like this would have on every household in America. Sure the feds would collect more tax money but they would esentially cripple the real estate market causing a ripple effect that would stun the economy.

What's your opinion on ever having this write-off reversed?

Submitted by donaldduckmoore on August 1, 2007 - 8:48am.

Good point, Alex. I believe no buyers really thought about this issue. They take it for granted. If that really happens, the housing market and even the global economy will come to a halt. But I don't think that the government will do anything to screw it.

Submitted by PerryChase on August 1, 2007 - 9:27am.

Interesting topic.

Personally I don't believe in government intervention because when they intervene, people will figure out ways to obviate government action.

Mortgage interest deduction was supposed to make houses more affordable. But the market automatically priced in the subsidy into the price of homes.

When the Federal government took away the non-mortgage interest deduction, people simply took out home equity loans to make their car and appliance purchases. The end result was the same to borrowers in terms of taxes. But it inflated homes prices because mortage interest deduction became more valuable so more people bought houses for the tax breaks. Plus consumers lost out because loans that were previously unsecured, became secured by the homes they could barely afford (and as we are now finding out, cannot afford).

As data shows, home equity is the lowest in many decades as people borrowed on their homes.

We are entering interesting time with record debts and little equity and savings.

Submitted by FormerSanDiegan on August 1, 2007 - 9:43am.

Factual correction:

The mortgage tax deduction was not introduced in the 1980's.

All interest (mortgage, credit card, etc) was deductible prior to the tax reform act of 1986. At that point most forms of interest were no longer tax deductible. Exceptions were made for mortgage interest with limitations (maximum value of loan limited to 1 million and up to 100K of home equity lines). Mortgage interest has been deductible since at least 1913.

Submitted by PerryChase on August 1, 2007 - 9:36am.

Ending the mortgage interest deduction during a real estate downturn when few buyers exist will not have much effect on prices because people already aren't buying. It'll prolong the downturn a few years but in the long run that'll be good for economy.

1. Prices will be more affordable for the masses.
2. Our standard of living will increase because owner and renter will have access to the same quality homes, since we no longer favor on over the other.
3. People will save some of their money instead of investing in homes. That money will be available to be invested in factories, research and other productive uses.
4. People will spend some of their money on consumption thus boosting the economy.

It'll take a few years of adjustment but we'll be fine. We didn't have the mortgage interest deduction before and we can do without it again.

Submitted by bsrsharma on August 1, 2007 - 9:50am.

I remember reading somewhere an analysis that concluded, (in steady state conditions, unlike the bubble implosion we are in now), eliminating mortage deduction may reduce the home ownership and home prices by about 20-25%. Another loophole is the tax free gain of $250K/$500K every 2 years that enhances the gain of home buying vs. other risks like stock/bond etc., investing that is taxed @15% long term rate. Net result is massive over allocation of capital towards housing stock to the detriment of other more productive investments. The craze of McMansions is a drain on land, building materials, energy, promotes illegal immigration, urban sprawl, induces people to assume needlessly large debt in turn causing rat race like lifestyle to pay for it and generally lowers quality of life.

Submitted by FormerSanDiegan on August 1, 2007 - 9:52am.

Since the interest deduction has been around longer than highly leveraged mortgages have been popular (prior to WWII most mortgages were much less than 50% of property values), we have NOT been without the deduction of mortgage interest before.

The issue of repealing or reducing mortgage interest was brought forth by Bush's panel on tax overhaul ideas. The idea was practically DOA because of the various lobbies (not just the NAR, but the 70% of people that "own" homes).

I could see the deduction further limited, e.g. capped at a lower maximum, say the same number as the Conforming Loan Limit. This would hurt places like East band West Coast, but might be easy for the rest of the country to buy into since it is only soaking the rich (and predominantly blue) states.

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