In the comments on the proposal I made yesterday, Doug asked a reasonable question:
Have you figured out what the deduction would be if you did this, and made it deficit neutral? That would be an interesting exercise.
Good question. Let’s do that.
According to various sources, the current cost of the mortgage interest deduction is about $131 billion, so let’s use that as our baseline cost. According to the U.S. Census Bureau, there are about 75 million owner-occupied homes in the country. So, let’s do the math.
$131,000,000,000 divided by 75,000,000 gives us about $1,750 per household to work with. If we assume that the average homeowner is in the 28% tax bracket ($139,350 – $212,300 of income for married filing jointly), that translates to a flat homeowner deduction of $6,250. If the average homeowner is in the 25% tax bracket ($69,000 – $139,350, which seems more likely to be closer to the nationwide average), we can give them a $7,000 deduction.
So, how does that compare to the mortgage interest deduction? According to Q2 data from the NAR the nationwide median price of homes sold in Q2 of this year was $171,900. If a buyer purchased said home with just 3.5% down at a 4.5% interest rate, they would pay approximately $7,410 in interest during the first year of their mortgage. If they put 20% down they pay $6,143 in interest. If you are in the 25% tax bracket and you deduct $6,143 from your income, your tax savings is $1,536—about $200 less than the flat homeowner deduction I am proposing. And don’t forget that the amount of interest you pay decreases every year of your mortgage, consistently shrinking and eventually eliminating your tax savings under the current system.
Obviously people who pay far above the national median price will get a much smaller benefit from this system than they do under today’s policy, but again, so what? If you’ve got the money to pay two or three times more than the average American for a home, why should the government be obligated to subsidize your purchase to a larger degree than for people who can only afford a more modest home?
It looks to me like the numbers work out. A revenue neutral deduction at $7,000 (~$1,750 tax savings) per owner-occupied home would be fair, or we could give the budget a bit of a boost and just make it a $5,000 deduction (~$1,250 tax savings). What do you think? Is my math screwed up, or would this actually work?