BLOG VIEW: With all of the hullabaloo in Washington over the ‘fiscal cliff’ and ways to generate new revenue, the holy grail of middle-class tax incentives – the mortgage interest deduction (MID) – has come under fire from both sides of the political spectrum.
Michael Barone, long time conservative political pundit and current fellow at the conservative-leaning American Enterprise Institute, recently was quoted as saying, ‘It's obvious now that we have over-incentivized homeownership, with government encouraging loans to non-creditworthy borrowers.’ Similarly, critics on the left contend that the MID overwhelmingly favors the wealthy and, therefore, isn't ‘fair.’
Both ends of the political spectrum, as is normally the case in the US, are completely out of touch with reality. The MID is an important and necessary inducement for promoting homeownership.
Our misguided friends on the right are deluded into thinking that a free-market without any intervention from government policy is always best. Do we really have to provide the litany of examples to demonstrate that ‘the invisible hand’ sometimes produces ills that simply cannot be permitted to persist?Â OK, stop me when you've heard these before: child labor, food safety, dram shop, usury, redlining, etc., etc., etc.Â
But it's not just the stopping of negative consequences in which the government can play a legitimate role, but also in the encouragement of positive outcomes such as mandatory school attendance, vaccinations, tax-advantaged college and retirement planning, and so forth. Sometimes the ends justify the use of government policy to discourage or encourage private behavior. I humbly put forth that the benefits of homeownership for individuals, families, communities and society justify a financial inducement in the form of the MID.
Our misguided friends on the left are so troubled by the concept of fairness that they miss the point: Life isn't fair (and cannot and should not be!).Â But beyond that novel idea is the truth about their contention that the MID overwhelmingly favors the rich.Â
Yes, wealthy homeowners deduct more interest because their mortgages are bigger, making the benefit favor the rich in total dollars deducted. Yet that completely ignores the fact that the relative impact from the MID is likely much more balanced among homeowners of all income levels.Â With the average new U.S. mortgage just over $220,000 in size, it is absurd to suggest that the rich are the primary beneficiaries of the MID.
The MID encourages positive behavior: planning for the future. Whether homeownership proves to be a good investment or simply a good savings vehicle, it is unquestionably the best method available to a majority of Americans to grow wealth over time.Â
Consequently, all Americans should be encouraged to become homeowners so homeownership can help them become more financially secure. Is the MID a manipulation of the market? Yes! Does the MID benefit you more if you pay a bigger mortgage? Yes!Â
And are those both good things for our society? YES!
David Coster is the author of Total Mortgage Services' Total Mortgage Blog and a guest blogger on MortgageOrb. Phil Hall's Monday column will resume on Jan. 7, 2013.