Let’s stop rewarding bad behavior

Industry Observer

 The principal residence mortgage interest tax deduction in its present form rewards homeowners with low equity in their homes.   Homeowners with little or no debt are paying a disproportionate share of taxes because they are acting responsibly.  Tax policy should be adjusted to give all homeowners a credit, not just those who have incurred debt.  We are somehow deluding ourselves into thinking that tax policy that encourages debt somehow encourages home ownership.  Actually, it just helps banks.

My proposal is that a tax credit of 1% of the purchase price of the home be given to all homeowners, annually, for as long as they own their home.  In a year when a homeowner sells and buys, credit could be claimed for both homes, an incentive to move up/down.  A credit of this type would be an incentive to buy, to trade, and to own.  It would eliminate cash-out tax advantages that probably shouldn’t exist anyway.    


Posted by

 Mike Carlier  Lakeville, MN





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Barb & Sal Dragotta
Macomb, MI
Macomb County Michigan

E.J. "Mike"...Interesting concept. Full Support on NOT rewarding bad behavior; somehow I don't think that it will fly in some quarters though; we seem headed to repeat the past Fa.M.& Fr.M. mandates.  We have zero mortgage. The fear that somehow receiving a 1% credit will be a debit rather than a credit gives me chills.  Have a great weekend--it appears that we in the North Mid-west may dodge the snow-ice bullet once again.

Barb & Sal

Feb 05, 2010 01:19 PM #1
Rich Bailey
WolfNet Technologies - Minneapolis, MN

While I fully support a movement against rewarding bad behavior, I don't think the mortgage interest deduction does that in and of itself. How does having low equity in your home automatically constitute bad behavior? There are lots of reasons why some people have less equity that have nothing to do with fiscal irresponsibility.Maybe they just bought their home recently, or qualified for a lower down payment because they have excellent credit (i.e. rewarding good behavior).

I think the tax credit permits responsible homeowners to build equity in their home more rapidly; it also stimulates the economy by giving newer buyers more cash to furnish their homes and buy other goods.  While people with more equity may incur a slightly greater tax liability under this scenario, they can also borrow against the equity of their home, refinance, and avoid paying other penalties like mortgage insurance; these are the rewards of equity.

Maybe the current tax deduction isn't an equitable tax among homeowners as you have described it, and there may be other solutions. But I don't think the tax deduction is rewarding bad behavior, but rather giving new homeowners a leg up on the long road to equity in their homes.

Feb 05, 2010 01:46 PM #2
Mike Carlier
Lakeville, MN
More opinions than you want to hear about.

Barb & Sal, certainly there is an amount that could be granted as a tax credit for home ownership in lieu of the mortgage interest tax deduction that would be revenue neutral.  In MN we get less snow than you, but it never melts.  What falls in December is here until April, or at least it seems so.

Rich, if the current deductibility does such a good job, why does it reward folks with smaller downpayments with more advantage than those with no downpayment?  Also, why does it help people strip the equity from their home and put it in their Driveway?  To the contrary, I feel that it encourages detours in homeowners' long road to equity.  It is bad policy.

Feb 05, 2010 02:12 PM #3
Rich Bailey
WolfNet Technologies - Minneapolis, MN

Mike, I think you have to separate the policy from people who choose to abuse it. There is a huge risk in stripping one's equity in that manner, and the tax break to me hardly seems worth it. Some people simply behave irresponsibly; that doesn't mean the policy is wrong, necessarily. Maybe what it needs is revision, rather than removal. But my original point is that I don't feel it's rewarding bad behavior inherently; in my case, it's doing quite the contrary. But people will always find a way to buck the system.

I know others who would argue the ability to borrow against the equity to remodel or buy other goods stimulates the economy. I agree this may work short-term, but I fear the long-term consequences are becoming all to clear in today's economy. Perhaps we agree on that.

Came across this article today - an interesting read. http://www.taxfoundation.org/blog/show/1382.html


Feb 15, 2010 12:24 PM #4
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