Tags: Jobs | Mortgage-Interest | Deductions | Home Sales

Targeted Taxes Will Spur Economic Growth

By    |   Friday, 28 March 2014 06:37 AM EDT

Employment and income will rise if we reduce income-tax deductions for mortgage interest and capital gains from home sales.

Prior to Oct. 14, 1987, the amount of mortgage interest that could be deducted from taxable income was unlimited. This amounted to a deduction of nearly $100,000 from taxable income when the 30-year fixed mortgage-interest rate was 10 percent at that time.

Following this date, the deduction was capped at interest on a maximum loan of $1 million plus a $100,000 home-equity line. At current rates, the deduction is more than $40,000, reducing tax revenue to the federal government by $68 billion in 2012, according to the Joint Committee on Taxation (JCT).

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A recent study by the R Street Institute suggests this tax preference doesn't benefit the broad society. The data indicate this policy doesn't generally incent home ownership, which was the original intent. Instead, it has caused an 18 percent surge in home size in the most affluent areas.

Homeowners with household incomes greater than $100,000 were between three to four times more likely to claim income-tax deductions than those earning less than $100,000 annually.

The average tax break for those earning over $100,000 was more than twice those earning less than $100,000, according to a study by Andrew Hanson, Ike Brannon, and Zachary Hawley in an upcoming issue of National Affairs, a public-policy quarterly.

Ironically, lowering mortgage-interest deductions can actually increase employment. While this policy may reduce demand for extremely large homes, it would increase demand for smaller, yet very comfortable ones. Instead of building one massive house on a given property, a developer might construct two. This would require more employment and investment, and it would generate greater profits, some of which could be reinvested.

Tax revenue would rise due to less interest deductions and a larger tax base created by greater employment and income. As a result, growth in deficits, debt and debt service would fall, limiting upward pressure on interest rates. Lower borrowing costs would translate to greater long-term investment and stronger income growth, further limiting debt creation and forming a virtuous feedback cycle.

The capital-gains exclusion on home sales is $250,000 per individual and $500,000 for married couples. This tends to favor the wealthy, since the median home price in February 2014 was $189,200 for an existing house and $261,800 for a new structure, according to the National Association of Home Builders. The average price is four times the 2012 annual median household income of $51,371, based on data from the U.S. Census Bureau.

The capital gains derived from these sales tend to go toward consumption rather than long-term investment. As such, the economic multiplier is smaller, leading to less job creation and income. This additional tax revenue will help perpetuate the virtuous cycle described earlier.

Households earning more than $200,000 reduced their 2012 tax bill by $561 billion annually, more than half the total savings of $986 billion for the entire nation, according to the JCT.

Welfare for the well-off is more insidious than that for the indigent. Lowering these deductions is critical for a healthy, growing economy.

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Employment and income will rise if we reduce income tax deductions for mortgage-interest and capital gains from home sales.
Jobs,Mortgage-Interest,Deductions,Home Sales
Friday, 28 March 2014 06:37 AM
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