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Over at the Washington Examiner, Philip Klein argues in favor of phasing out the mortgage interest tax deduction, an idea that seems to be gaining some traction with the likes of Republicans, such as House Ways and Means Chairman Rep. David Camp. It shouldn’t have.
Phasing out this deduction may, at least to market fundamentalists, rest on sound economic logic, but politically there is very little to be said for it. Before we get to why, let’s remember a few things:
Yes, as Mr. Klein notes, the deduction is ‘expensive’, but, despite it, the amount of tax imposed on property in the US (expressed as a percentage of GDP, 3.0% in 2012) is already at the higher end of the OECD range. Let’s also note that, expressed again as percentage of GDP, the taxation of personal income (I am unclear whether this is includes state and city taxes) in the US stands out as neither particularly high nor particularly low. In 2012, it was equivalent to 9% of GDP, compared with Germany’s 9.6% and France’s 8.2%.
Those income state data do not disclose how that income tax burden is shared. Well, fear not, redistributionists — the US already has one of the most progressive tax systems in the world. Scrapping the mortgage interest deduction will make it even more so. That might be fine in the eyes of people on the left, but those folks should be left to get on with their dirty work without a helping hand from the likes of Rep. Camp.
And then there is the matter of simple political reality. Mr. Klein’s preferred approach to the deduction is “to slowly phase it out over time as part of a broader tax reform that lowered tax rates for everybody.” That’s not illogical, but it is naïve. The mortgage tax break is one spot of relief from the IRS that has, up to now and for the most part, been politically untouchable. To swap that for a reduction in rates that could be all too easily reversed would (in the absence of structural tax reform of a type that is not, sadly, going to take place) be madness.
The mortgage interest tax deduction should stay.