‘How My Taxes Are Raised Matters’

We are not going to solve our long-term deficit problem without more revenue. Is it time for the mortgage interest deduction to go?:

How my taxes are raised matters, by Richard Green: .To get to fiscal balance, I need to pay higher taxes. … The federal government can get at me one of two ways: it can scale back or eliminate my deductions, or it can raise my rates. If my mortgage interest deduction goes away, for example, my federal tax liability would increase by around 10 percent; alternatively, the federal government could just charge me a ten percent surtax on income.

If my income is taxed, the impact on my desire to work is ambiguous. On the one hand, because the cost of leisure would fall, I would have an incentive to work less. On the other hand, if I want to restore my previous after tax standard of living, I would have an incentive to work more.

If you take away my mortgage interest deduction, however, the impact is not ambiguous–I will have an incentive to work more. Leisure is no less expensive (there is no substitution effect), but my desire to restore my previous income remains as before.

Who would this affect the most?:


The white bar in the graph shows the distribution of the home mortgage interest deduction. The deduction is concentrated in the upper end of the income distribution, e.g. 69% goes to households making at or over over $100,000 (in 2004).

From Suzanne Mettler, the source of the graph and statistics:

In an age of rising economic inequality, our nation has permitted the continuation of these submerged policies that aid primarily the most advantaged Americans and sharply reduce federal revenues, making programs that could assist low to moderate income people far more difficult to afford. The design of these policies obscures them from view, and neither policymakers nor the media do much to reveal them to the public. They are also shrouded by the fact that they are not part of the regular budget process: they face fewer hurdles in being enacted in Congress than regular spending programs, and once in place, they operate essentially on “autopilot.” Even if they grow into large entitlements, like the ones mentioned above, policymakers are never obligated to revisit the question of their value or costs.

As the supercommittee looks for how to proceed, reducing tax breaks—at the very least, curtailing their bias toward the wealthy—could go far to improve the nation’s balance sheet and to reduce inequality.

When I was a renter, I didn’t think this deduction was fair. Now I am sort of attached to it, but if taxes need to go up — and they do — this is one way to do it.

This post originally appeared at Economist’s View and is reproduced with permission.