The Mortgage-Interest Deduction

A Very Significant Tea Leaf in the GOP Platform

The GOP platform lays the groundwork for Romney's coming assault on the middle class.

Everyone is talking about the GOP platform on abortion, with no rape or incest exceptions, and some people are talking about the equally dishonorable failure to support civil unions, which George W. Bush endorsed back in 2004.

But fewer people are paying attention to a plank that could have far greater ramifications than either of those--the debate about what kind of language to include on the home mortgage interest deduction.

Why does this matter? It is of course the biggest middle-class "tax expenditure" in the land, as well as the greatest boon to home ownership. More than 35 million Americans claim it, and it costs the government something a little north of $100 billion a year in tax revenues the government would otherwise claim if the deduction did not exist. In case you've been on Mars, here's a simple explanation:

To see how this works, consider two families with equal incomes of $100,000. One family owns its house and pays $2,000 in interest on its mortgage each month, or $24,000 annually. The other pays $2,000 a month to rent an apartment. The family that owns its home can deduct $24,000 from its taxable income and pay taxes as if it only earned $76,000. The renter family is taxed on all $100,000 of its income.[1] The homeowners pay about $6,000 less in taxes a year.

Okay, now. As you know, Romney says he's going to cut taxes massively, increase defense spending, and balance the budget. He says he'll accomplish this by eliminating tax expenditures--the subsidies and laws that reduce people's and corporations' tax bills and thus deprive Washington of revenue.

He of course won't get very specific about which of these he'll eliminate. He has said that by eliminating the deductions that are used largely by the rich, he'll plug the hole. But the Tax Policy Center, in that devastating report from two weeks ago, said that this would be impossible, that there isn't enough revenue there to plug the hole.

Therefore, it argued, Romney will inevitably have to go into deductions for middle-class people, which is why, the TPC said, the overall tax bill for middle-class people would actually rise, even as their official marginal tax rate was lowered. With me?

So: The Republican platform in past years has included language in favor of keeping the mortgage interest deduction. After all, not only is it something the middle class has come to rely on. The realtors' and home builders' lobbies likes it fine, too. But this week, reports Bloomberg's James Rowley:

Republican platform drafters refused to put their party on record for preserving the mortgage- interest deduction, giving Mitt Romney more flexibility to promote his plan to lower tax rates paid by corporations and the wealthiest Americans without increasing the federal debt.

Hmmm. After Rowley's story moved at 11 yesterday morning, The Wall Street Journal reported four hours later that the realtors and home builders got to work and wheedled a compromise out of the platform writers. The new language says the party backs comprehensive tax reform first and foremost, but should Congress fail on that front, “we must preserve the mortgage interest deduction.”

In other words, preserving the deduction is a fallback position. Giving Romney the possibility of eliminating it comes first. Now, Romney has said that he wouldn't touch this deduction. But he says a lot of stuff, almost all of it false, so I see little value inhering in the fact that he said something. Dave Johnson of the Campaign for Amerca's Future, while noting the deduction's shortcomings as policy, smells something fishy:

For Romney's tax plan to work, with its promise to be "revenue neutral," he has to find big money somewhere to make up for the rate cuts. The mortgage interest deduction is big money, and today there is a tea leaf for us to read. [i.e., the platform plank]...

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...There are reasons that the home mortgage interest deduction is a problem. It "distorts" the housing market, causing housing prices to be higher than they would be without it. It gives a bigger tax break to people who make more money, and for buying more expensive houses. It encourages too much borrowing. So it is a policy problem. But it is also today's reality that millions upon millions of people depend on it and on the market distortion it brings with it. Even phasing it out slowly would have terrible consequences.

So, is the home mortgage interest deduction on Romney's chopping block? It is hard to imagine the Romney tax plan adding up without this.

It's the old adage. Watch what they do, not what they say. And thus has the groundwork been laid for a coming assault on the middle class. Of course I doubt a President Romney could eliminate this deduction. He'd be crushed politically.

So this means, by definition, that he'll run up the deficit like a drunk at a hundred-dollar crap table. Their numbers never add up. They didn't add up under Reagan, who left the country with a far larger deficit than Jimmy Carter had, and they certainly didn't add up under Dubya. And they don't add up now. Never will. They're fantasy.