10/28/2012

The distributional effects of getting rid the home mortgage deduction

This is another typical biased New York Times story on economics.  There is another simple reason that is ignored by the Times for why lower income people get a smaller benefit from these tax deductions: they face much lower tax rates.
. . . For those households, by the center’s calculations, the tax benefit of the deduction amounts to about 1.5 percent of after-tax income. By way of comparison, the value to households earning $40,000 to $50,000 is closer to 0.3 percent of after-tax income; for households earning $50,000 and $75,000, it is 0.7 percent. 
Why is this so? One reason is simply that people who have more money are more likely to have expensive homes and bigger mortgages. They may also have second homes, and under the current rules, mortgage interest may be deducted on those as well, up to a cap of $1 million in debt. 
The other factor is that the value of the subsidy increases along with your tax bracket.
For households in the 15 percent bracket, the tax benefit for every $1,000 of mortgage interest deducted is $150. That benefit rises to $350 for households in the 35 percent tax bracket. . . .
Yet, what this study shows (assuming that it is correct) is that a large portion of taxpayers would not lose very much from losing this deduction.

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