Trump may begin dismantling the US’s worst tax law

It’s a start.
It’s a start.
Image: Reuters/Andy Clark
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America’s mortgage interest tax deduction is an abomination. Not only is it a massive gift the US government gives to the rich at the expense of the poor, it distorts the economy in the process.

According to the Pew Research Center, in 2016 the tax break cost the government $77 billion. Nearly 80% of that went to the less than 20% of US households with total income of more than $125,000. The one third of households that are made up of renters, who are disproportionately poor, receive absolutely nothing from this break, and pay higher taxes in order to make up for the lost revenue.

Economists almost universally hate the interest deduction for homeowners. There is no evidence that incentivizing wealthier people to buy more homes does anything good for the economy, and by encouraging middle-class people to buy homes, it decreases geographic mobility and leads people to become overly reliant on a healthy housing market.

Many tax-reform experts feel the mortgage interest deduction is indestructible because most politicians dare not support getting rid of it—for fear of angering the millions of homeowners who benefit from the law and going up against the powerful real estate lobby (paywall).

But recent news suggest it just might be the beginning of the end for this terrible policy, which is offered in few other countries. The political news website Politico reports that lowering the cap on the mortgage interest tax deduction is on the table as part of the Republican party’s efforts to pass federal tax reform. A former staffer to Senate majority leader Mitch McConnell, who is designing a tax-reform plan along with other Republican congressional leaders and members of the Trump administration, says that the cap on the deduction, currently set at $1 million, could drop to as low as $500,000, Politico reports.

The main goals of the party’s proposed tax overhaul is to reduce corporate tax rates and to lower and simplify individual tax rates. Some would-be reformers dubiously claim that not all of the revenue loss need be offset because the tax cuts will lead to an increase in economic growth, and thus higher revenue. But in order to lower tax rates and not balloon the deficit, the government will need new sources of revenue. The mortgage interest tax deduction is an obvious target. Ironically, that’s in part because other parts of the bill are so beneficial to the wealthy—rich households might not put up that much of a fight over a cut in their mortgage interest deduction because the lower individual tax rates look so enticing. 

Getting the deduction down to $500,000 would just be a start, but it would be a very good one—not only because it would minimize the deduction for its very wealthiest, and least needy, recipients, but because it would prove that it’s politically feasible to do so. Future administrations looking for revenue to balance the budget or to fund programs like Social Security or housing for the poor might more readily look to slashing the deduction.

Of course, any hope of reform will depend on the Trump administration and Republicans in Congress exhibiting dealmaking skills they have yet to demonstrate. Plus, the real estate industry will fight reformers tooth and nail. 

If the recent bungling of healthcare reform is any indication, wealthy homeowners shouldn’t be getting too worried.