Let’s face it; the mortgage interest deduction is a terrible idea. Homeowners love it, of course, but there’s no reason government should incentivize people through the tax code to borrow hundreds of thousands of dollars to buy houses they wouldn’t otherwise buy.
Thirty-three million households took this deduction in 2014, but many of them would benefit if it were abolished in favor of a lower tax rate for everyone. Still, this carve-out is now in the price of most homes, and therefore people would object strongly and justifiably to its overnight abolition.
Which brings us to one of the virtues of President Trump’s plan to reform the personal income tax code. It starts to do away with the mortgage deduction not by killing it in cold blood, as it were, but by letting it wither on the vine. Although it would remain in place, it would become unnecessary for most people in practice.
That’s because Trump’s plan nearly doubles the standard deduction. That comes to $24,000 for a married couple. In order to pay that amount in mortgage interest in a single year, you would have to be in the first year of a mortgage greater than $500,000. If your mortgage interest and charitable deductions don’t combine for $24,000, then you don’t have to bother itemizing, which will also make your taxes a lot easier to do.
Another benefit is that everyone can get the standard deduction, renters and homeowners alike. That makes the system fairer because while it doesn’t penalize homeowners (and might actually benefit all but the wealthiest ones) it also extends the same benefit to millions more people who prefer renting to buying.
Under Trump’s simpler proposed system, the only other itemized deductions that would remain are for retirement savings, charitable donations and presumably (since it’s in his healthcare proposal) health savings accounts.
The more hysterical objections to this rough outline, especially that of the New York Times’ editorialists, reveal the disingenuousness of most Democratic complaints about “tax cuts for the wealthy.” Any plan that lowers rates and eliminates obscure special deductions works in favor of renters and other taxpayers who tend to have lower incomes.
Only 44 million households, less than a third of filers, take itemized deductions, according to the IRS’s annual Statistics of Income publication for 2014, the most recent year available. Of these, 57 percent have gross income greater than $75,000 a year. In contrast, the 103 million who take the standard deduction already have a much lower income; 90 percent of them make less than $75,000. For this latter, lower-income group, the doubling of the standard deduction is all gravy. For the former, the plan represents a trade-off that will help some of them pay less and make others pay more.
According to the IRS, the average earner of $10 million or more takes more than $4 million in itemized deductions. Trump himself took $17 million in itemized deductions in 2005. This helps you appreciate how a simpler system like the one Trump has proposed, even if it reduces that rate for top earners from nearly 39.6 percent to 35 percent, creates trade-offs, not new benefits, for the wealthy.
What it will do is reduce the immense dead loss time and resources that go into filing individual taxes. It will reduce the severity of market distortions that the tax code creates. That would be a win for everyone, and we hope the final plan that Trump and Congress produce is faithful to those ideas.
