I'm gonna be in hot water for this one!

Front and center in the news these days is tax reform.  Republicans go so far as to call it a "middle class tax cut", even though the facts suggest otherwise, that the middle class will get a very small slice of the tax cut pie.  But now some details are emerging that are bound to be controversial, and one in particular finally addresses something I've thought long and hard about.

Whenever someone says "home mortgage interest deduction" most people usually quickly nod off, except those few who actually receive that tax write off, and they sit bolt-upright.  Here are some numbers to illustrate where we are:  Roughly 65% of Americans own their homes, meaning they don't rent.  Of those, roughly 60 don't get a tax write off for the interest they pay on their mortgage because they either have no mortgage (their home is paid for) or they owe so little on their mortgage they're better off just taking the "standard" personal tax deduction.  

If you do the math you'll find that 61% of Americans are subsidizing the other 39% to own their homes.  I find this mildly amusing because these 39% are often the same ones who protest the loudest about the subsidies/write offs government gives to large corporations for various reasons, referring to it scathingly as "corporate welfare".  Umm...so subsidies "for me" are good, but not "for them"?  *snicker*

The traditional justification used for a mortgage interest deduction is that it promotes home ownership, which in turn promotes more civic activism and more informed citizens.  They supposedly go to the polls and vote more often and are more involved in local issues, schools, etc.  Unfortunately that argument just doesn't hold water.  There is ample evidence that shows it is the level of education and income that leads to more civic involvement, not necessarily home ownership.  (Home ownership among younger, well educated, affluent adults is slowing dramatically as they are marrying and starting families later in life.)

Of the four countries shown here that compare demographically favorably with the US, we are the only one who still allows mortgage interest deductions.  With or without special tax advantages, home ownership for all four hovers around the same 65-68%.

"But...but...without that deduction, we'll never sell any houses!  We'll all DIE!!"  So says the Realtor and builder trade groups.  (Full disclosure...I've been a homebuilder for 45 years.)  Not so fast Kemosabe.  Remember back in the 1980's (?) when the IRS began phasing out the interest deduction allowed on credit card debt and auto loans?  The cry back then from those industries was the same gloom and doom.  Truth is the financial services and auto industries were unfazed.  The deductions were phased out over a number of years, giving people time to prepare and adjust for the new reality.

Here's where it gets interesting for me.  As things are now, people are incentivized to buy the biggest home they can, with a helping hand from the IRS.  In my area at least families of just two or three people are convinced they need 4,000 square foot McMansions.  (More full disclosure...I build 4,000+ square foot McMansions.)  Imagine how much more efficiently we could use our resources if families of 2 or 3 scaled back their expectations and lived in 2,000-2,500 square foot homes?  Well appointed, custom quality, super-energy-efficient smaller homes.

I predict MORE people would buy smaller, more affordable homes, even after factoring out the tax deduction.  Builders would build more homes, employing more architects, carpenters, plumbers, electricians, painters, etc.  Our home ownership rate would go UP.  Realtors would sell more homes.  Lenders would make more loans.

Who would lose if the mortgage interest deduction was phased out?  The 39% who now enjoy it, and the tax preparers who will no longer be needed to itemize taxes when everyone goes the standard deduction route.  And the property tax collectors who right now want nothing but BIG houses in their communities because of the tax $$$$ they bring in.  (But if they'll look a bit further down the road they'll realize more smaller homes vs fewer big homes should make this all revenue neutral.)

Who wins?  The taxpayers, all of us, because we'll see another 70-100 BILLION dollars in our treasury every year.  And if the IRS used that $70-100B to fund the doubling of the standard tax deduction for everyone, then we'd have a true middle class tax cut.

Am I missing something?  Your opinion?

S