Originally published on Forbes.com.
George Will needs some help if he is going to keep commenting on tax policy. His column “Alas, the Mortgage-Interest Deduction Cannot Be Pried Away” has a real howler. I find it painful, because I really admire George Will. I wouldn’t go so far as man crush, but it is close. George Will earned my lifetime gratitude by introducing me to the work of James Gould Cozzens. Even George Will’s embrace of the IRS scandal narrative couldn’t cancel that. As a matter of fact, it is because of George Will and Joe Kristan that I remained the last IRS scandal agnostic. George Will now having demonstrated severe tax illiteracy leaves just Joe Kristan as the only person I know of with any sense who I thought bought the notion that IRS minions stole the 2012 election. (See Update. I was mistaken about Joe’s position.)
Why Tax Reform Is One Of The Nice Things We Can’t Have
At any rate, Will starts out by making, much more eloquently than I could, a good observation:
Attempting comprehensive tax reform is like trying to tug many bones from the clamped jaws of many mastiffs. Every provision of the code — now approaching 4 million words — was put there to placate a clamorous faction, or to create a grateful group that will fund its congressional defenders
I did something like this in post titled Why Tax Reform Is Impossible. I summarized the comments that just about every single interest group will compose when comprehensive tax reform is in the wind:
Comprehensive tax reform and simplification is a fantastic idea. We here at the ABC Coalition for DEF just love the idea that you are working on it and totally support you. Of course we are sure that you know the DEF is critical to the American way of life and the health, safety and well-being of the world. We would just like to remind you that the GHI deduction and the JKL credit play a critical role in supporting DEF. So when you are doing your simplifying don’t even think about messing with the GHI deduction and the JKL credit. As a matter of fact, you probably should beef them up a bit and get busy on the MNO exemption that we have been asking for. Other than that, chop away at those special tax breaks and give us a simpler Code.
At any rate George Will focuses on that most sacred of sacred cows, the mortgage interest deduction.
The deductibility of mortgage-interest payments, by which the government will forgo collecting nearly $1 trillion in the next decade, is treated as a categorical imperative graven on the heart of humanity by the finger of God because it is a pleasure enjoyed primarily by the wealthy.
Cui Bono?
Frankly, I think that analysis is off. It pretty much depends on how you define wealthy. It is a funny thing about being the type of CPA that I am – focusing on tax issues in real estate and for high net worth individuals. When I’m out eating with people, it is not at all unusual for me to be either the richest person at the table or the poorest. A gang that I frequently end up with at Papa Gino’s, where I inevitably pick up the check, observing my consistently operational car, pretty nice condo and, get this, the fact that I pay somebody to clean my home views me as wealthy. People who find my services of value – not so much.
It is actually people in my category and a couple of grades up, that find the home mortgage interest deduction valuable. And you can consider us wealthy if you would like. But to people who we consider wealthy, for whom I do planning, it is really not very significant. As it happens, I tend to think that even for people who do benefit from it, it tends to be overrated. You might want to check out Kelly Phillip Erb’s book – Home, Sweet Rental: Busting The Hype Of Homeownership. She writes of the mortgage interest deduction:
So yes, there’s a tax break. But whether it’s enough to make up for the outlay depends on your own facts and circumstances—and for many taxpayers, the numbers just don’t add up.
Actually I think the real constituency for the home mortgage interest deduction is the band of realtors who conspire to get us to spend more on homes than we really should. Consider this ad from the National Association Of Realtors.
Following the release of the Deficit Reduction Commission’s report, which recommends scaling back the mortgage interest deduction, the National Association of Realtors® is warning Congress of the potentially devastating effects of such change on American families and the economy.
And then there are the home builders, The National Association of Home Builders has a website devoted to defending the deduction.
The mortgage interest deduction, which is sometimes called the MID, has been a cornerstone of American housing policy since the inception of the tax code more than 100 years ago. It supports the aspirations of families at all income levels to become home owners, and Americans overwhelmingly oppose any action by Congress to tamper with the deduction.
Why You Shouldn’t Have George Will Prepare Your Tax Return
So I differ with George Will, but, so far, we are pretty much on the same page. Here is where he goes off the beam:
Elimination of the mortgage-interest deduction would have to be grandfathered to accommodate those who budgeted for their home purchases with the deduction in mind. Even so, it will not happen. Neither will limiting the deduction by denying it to a tiny top sliver of the largest mortgages — say, portions of mortgages over $500,000. (Emphasis added)
I’ve read that a few times to make sure I am not misrepresenting George Will. It is pretty clear that he is saying that there will never be a limit on the home mortgage deduction and that he is using $500,000 by way of example. That is disturbing.
The reason it is disturbing is that there is, in fact, already in effect a balance limitation on the home mortgage deduction. Forgive me as I go geeky on you. Code Section 163(h)(2) denies deductions for “personal interest”. It includes an exception for “qualified residence interest”. A limited exception. A million for acquisition indebtedness and $100,000 for “home equity indebtedness”. The million-dollar limitation has been there since 1987 when the Tax Reform Act of 1986 went into effect.
Interestingly, there was something insidious about that limitation. It is not indexed for inflation. When the limitation went into effect, the FHA Housing Price Index stood at 119.91. For fourth-quarter 2016, the index was 314.95. So we could say that somebody trying to buy the same house that was funded by a million-dollar mortgage in 1987, would have a mortgage of over $2.6 million. Less than half of that would be deductible. If we make the dangerous assumption that ]home prices over the long run will continue to rise, we can expect the value of the home mortgage interest deduction to continue to erode.
Well, I’m still going to value George Will’s opinion on important things like literature, but his credibility on tax matters is entirely shot. I’ll still be an IRS scandal agnostic, but that now rides entirely on Joe Kristan. I hope he can take the pressure.
Update
Joe Kristan indicates that I have overstated his embrace of the scandal narrative.
I don’t believe the IRS decided the 2012 election. I don’t think it was close enough for that to make the difference. I do believe that the IRS was grossly partisan and unfair in their treatment of Tea Party groups. That’s plenty of scandal by itself.