Spring Cleaning! Clean House! Cleaning up! A fixer-upper! These expressions have been used for years to describe a house in need of work or the work done to a home. In the last several years, with the rise of “reality” TV shows (if I might use that word to describe shows that have no basis in reality) we have added another term to the lexicon – Extreme Home Makeover!

Each of these expressions implies a thorough job. A complete job! Often, its use describes a total transformation! You have seen the “before’ and ‘after’ photos. It’s like looking at a new house.

There are other phrases used as well. Tidy up! Dust! Touch up! These suggest something less than a total effort. The term whitewash is also used but often intended to imply covering up the warts, not cutting them out. These efforts do not produce a result worth capturing in a photo.

I can just imagine the questions forming. Readers are probably asking what does this all have to do with taxes?

I confess the title is somewhat misleading. This post is about a total do-over of our tax code beginning with the home mortgage interest deduction (MID). Our tax code is not a fixer-upper. It can't be fixed.

I am not talking about a light dusting, nor even a sweep and mop. The more recent term “extreme makeover” seems much more appropriate. And rather than comparing before and after pictures of a house, let’s look at two documents.





1913 Form 1040 - 1 page form; 2 pages of schedules; 1 page of instructions. 
2014 Form 1040 v2.jpg
2013 Form 1040 - 2 page form; over 10 variations; more than a dozen possible additional forms and a dozen possible schedules.  Instructions run to more than 200 pages not including attachment instructions.

It has been said that a picture is better than a thousand words. Please click on the hyperlinks and take a closer look at these two forms. However, I want to clarify. I am not one much interested in looking back. I think we are better served looking ahead. But there is much we can learn from our history, including tax simplification. Nor am I suggesting the MID is the sole source of our tax complexity, just one on a long list.

Before you click the “X” in the corner and get out pen and paper, OK, in today’s world maybe get on Facebook, to notify your congresswoman and your neighbors that a radical revolutionary is proposing getting rid of the MID, read further.

Yes, I believe we should eliminate the MID, BUT, as part of an overall renovation. I am talking The Money Pit here. This work will take longer than the two weeks promised in the movie to accomplish but that is what we should do. We should give Congress a ‘honey-do’ list, a list that will run to many pages. I will discuss other sections of the code in later posts, however, but today I will remain focused on the MID.

It is fair to ask, "Why first?" Or, "Why at all?" Because it’s huge! It’s ineffective! It’s counter productive! Do I need to go on? Let me address these three problems with the MID.

First, the tax revenue cost of the deduction is massive, gargantuan, enormous (pick your favorite adjective here.) According to estimates offered by the Joint Committee on Taxation (JCT) for FY 2012 - 2017, the cost of the MID is second only to the favorable treatment afforded health care premium benefits as a tax expenditure. For those who want to criticize the Earned Income Tax Credit, the MID outstrips this expenditure.

To clarify, tax expenditures are defined under Sec. 3. (a)(3) of the Congressional Budget and Impoundment Control Act of 1974 as "revenue losses attributable to provisions of the Federal tax laws which allow a special exclusion, exemption, or deduction from gross income or which provide a special credit, a preferential rate of tax, or a deferral of tax liability."

During that multi-year period, the cost (reduced taxes) of this preferential treatment is estimated to approximate $364 Billion. This amount would put the cost of this program ahead of almost 130 countries based on the 2012 ranking by GDP. I don't know about you but that buys a lot of paint and molding for a makeover.

Second, while the purpose of the presumed benefit is unclear, its ‘raison d’etre’ generally falls within one of two described goals. These are to promote home ownership and to make home ownership more affordable. In other words, Congress feels the need to encourage more Americans to buy a home and to make the cost of that purchase less burdensome. There are perhaps others but lets use just these two.

The evidence is unclear in both instances. First, for most middle class Americans, the benefit is ambiguous at best. Again, according to JCT estimates for 2012, $68 billion was paid out through MID in lower taxes. This amount was spread among only 34 million taxpayers leading to an average result of $2,000 per year. But the average is meaningless.

Taxpayers with income under $50,000 only claimed 8% of the total benefit, or less than $6 Billion. Taxpayers earning over $100,000 claimed almost 78% of the total benefit., while those earning in excess of $200,000 took almost 34% of the prize. Viewed in the light of day, it seems that the mortgage interest deduction isn't the middle-class panacea as it is often portrayed to be. 

Bottom line, middle class taxpayers save, on average, about $50 per month by virtue of the MID. I suspect many reasonable people would agree that this amount is not sufficient to compel someone to buy versus rent. It is true that the MID frequently allows taxpayers to become "house rich" buying more house and taking on more debt than they perhaps should.

Too much house? Maybe? The number of houses? Unclear! A number of studies have been conducted, comparing the percentage of home ownership in the United States with other developed countries. The data is inconclusive whether the MID has any significant impact on the rate of ownership.

Third, how does the increase in home prices caused by the preferential tax treatment of mortgage interest fit with the assumed intention of making home ownership more affordable? Answer. It doesn’t!

As it stands, a middle class taxpayer saves, on average, $50 each month on the cost of their home due to claiming the MID. But if the cost of that home has been increased because of the MID, doesn't that just take money out of the right pocket and put it in the left.

If an average couple saves $18,000 on interest as a result of lower taxes (let's forget inflation for a moment) how does that reduce a cost of a home that, according to most estimates has been inflated by as much as 15%? Hasn't this couple been forced to pay $150,000 for a home that might well have been purchased at a cost of $130,000. Is this home really 'more affordable?'

The movie, American President, concludes with a really powerful speech. It is a shame that the truly powerful, profound speeches today are made by actors rather than our elected leaders. That said, part of that speech is excerpted below

We have serious problems to solve, and we need serious people to solve them. And whatever your particular problem is, I promise you, [fill in the name of any politician] is not the least bit interested in solving it. He is interested in two things, and two things only – making you afraid of it, and telling you who's to blame for it. That, ladies and gentlemen, is how you win elections. You gather a group of middle age, middle class, middle income voters who remember with longing an easier time, and you talk to them about family, and American values and character, and you…scream about…This is a time for serious people…

Good words. And they are applicable to our present situation. Fixing our tax code is a serious problem. And we need serious people to accomplish the task. But American taxpayers have to drive that accomplishment. We are all tied to our favorite pet preference. Let’s cut them loose. All of us! All of them! Let’s start that effort with the MID!

Let’s loudly and collectively shout to Congress that we demand reform. We do not care about retention of the MID as long as its demise is part of an extreme makeover!

Hey! I think I can hear a loud shout. Nope. My bad. It’s the National Association of Realtors yelling at me: "Here’s my hat, there’s the door, what’s my hurry!"

Beam me up Scotty! If I am not back in a few days, continue to "boldly go where no man has gone before!"

AuthorDoug Spiker