Would you be willing to give up the federal income tax deduction for owning your home? If you're like me, you're probably thinking "certainly not." The home mortgage interest deduction is the sacred cow of our tax system. It saves typical homeowners thousands of dollars a year on their tax bills.
But let's change the question. Would you be willing to give up your mortgage interest deduction if in exchange you could have a postcard flat tax return and be forever liberated from the drudgery of complying with a mindlessly complicated, unfair and economically dysfunctional tax code?And what if this new tax system would not raise - and probably lower - your overall tax liability?
Now this should sound like a more enticing offer. I'm a homeowner who believes that the housing deduction is valuable - but expendable. I'll take the simplicity, the lower rates, the fairness and the peace of mind from a flat tax any day over a system of high tax rates and a multitude of deductions.
Americans are understandably uneasy about the impact of eliminating the home mortgage deduction. The housing lobby in Wash-ing-ton has spent hundreds of thousands of dollars on bogus studies intended to scare homeowners. For example, the Realtors say that a flat tax would depress home prices by 30 percent. Since millions of American families have most of their equity in their homes, this is a frightening proposition.
Luckily, it's wrong. In the 1980s the value of the mortgage interest deduction fell in half when income tax rates fell substantially. (A deduction is worth 70 cents on the dollar when the top tax rate in 70 percent but only 40 cents on the dollar with a 40 percent tax rate.) Yet from 1980 to 1989, even as the value of the home mortgage deduction fell, home prices doubled in the 1980s in most markets.
How was this possible? Because home values are driven by two variables: incomes and interest rates. Incomes rose and interest rates fell when tax rates fell. Almost all economists agree that a flat tax would lower interest rates and raise family income levels. This will allow Americans to buy bigger and better homes.
We also have evidence from other countries suggesting that the home mortgage interest deduction is not as critical as the housing lobby pretends. Canada does not allow a home mortgage interest deduction but has homeownership rates comparable to those in the United States. Australia does not have a housing tax deduction, but it has higher homeownership rates than the United States.
I often remind my more liberal friends - who are worried that a flat tax would only benefit the rich - that the homeowner tax deduction benefits the wealthy far more than the middle class and the poor. Upon reflection, this should be obvious. When a wealthy person builds a $500,000 house, the value of the tax deduction is at least five times higher than when a moderate income American buys a $100,000 house.
When the nonpartisan Citizens for a Sound Economy examined the savings from the home-own-er-ship deduction, it found that the average household with income more than $100,000 received an average tax savings of $5,581 from the mortgage deduction. The average household with less than $40,000 of income saved only about $800.
My point here is not to denigrate those who work hard and succeed in America. If rich people can afford a 50-room mansion, God bless them. My point is only that if the policy goal is to promote first-time homeownership, the mortgage deduction is a very inefficient way to achieve the goal.
Owning a home is the epitome of reaching the American dream. Almost two-thirds of Americans now own a home - a great success story. But homeowners don't need the mortgage interest deduction.
All Americans would be better off with a vastly simplified tax system that does not require them to hire tax accountants and lawyers to figure out. Homeowners will not suffer under a flat tax - but Washington lobbyists certainly will.