The release of a snippet of Donald Trump's tax return from 1995 showing a net operating loss of nearly $1 billion, potentially allowing him to legally avoid paying taxes for an 18 year period, has given us another reason to condemn Donald Trump and the complicated provisions in the tax code pertaining to real estate that allow Trump and others like him to pay much less in taxes than the rest of us. One tax professional told me that there's no reason for a big real estate concern to ever pay income taxes of any kind to the government if they have an accounting firm that knows what it's doing.
A few people have expressed a hope that, should Trump lose, Congress would begin to look at some of the various real estate tax loopholes that allow such legal tax evasion. I would wholeheartedly agree with such sentiments, and humbly suggest that the purge begin with the most egregious and expensive real estate tax break of them all--the mortgage interest deduction.
The MID costs the government $80 billion a year in lost revenue and is one of the most expensive tax breaks in the code. It may also be the least effective--because it's a deduction (as opposed to a credit, or direct subsidy) that means that only the wealthiest homeowners (the top 30% or so) can actually take the deduction.
And a progressive tax code it means that the higher is a household's income, the higher the rate they pay and the more they save from each dollar they deduct, so benefits go up disproportionately with income. Compounding the inequality of the MID is that tax savings also goes up when the mortgage size goes up. Taken together it means that a family in Moline making the median area income that buys an average-priced house will save about ten percent of what the median earner in San Francisco does when he uses a mortgage to buy the median house where he lives.
But it gets worse. The reality is that the effects of the mortgage interest deduction are already priced into houses, so literally no one buying a home gets any benefit from it: they have already accrued to existing homeowners. In effect, it is a tax break that rewards existing homeowners and no one else.
If we're ever to achieve some modicum of tax reform--which I take to mean lowering rates and eliminating various deductions, credits and exclusions--the mortgage interest has to go. That's implicit in some of the tax plans issued by the various candidates: Donald Trump's plan would induce many more people to avail themselves of the standard deduction and eschew itemizing their returns, a necessary step to take deductions like the mortgage interest deduction. If the proportion of people who used the MID fell from 30% to 10%, it might become politically feasible to phase it out, a thought that strikes terror in the hearts of Big Housing--agglomeration of home builders, realtors, mortgage bankers and the like whose incomes go up with housing prices.
A recent Morgan Stanley report released this week analyzed the impact of eliminating the deduction and it was illuminative: it sees only temporary housing price declines from such a step and even smaller short-term impacts on the broader economy.
Brookings Scholar Richard Reeves suggested that liberal attempts to reduce income inequality always target the top one percent, and that this target is incorrect: The bigger problem in his estimation is the top twenty percent that are skating away from the rest of the hoi polloi, and he suggests we stop pretending that they aren't rich. Taking away one of their biggest tax breaks--that does precisely nothing for the economy and goes almost entirely to the top quintile---is a necessary step if we're ever to achieve any semblance of reform.
By all means let's fix the tax code and eliminate the complex tax breaks for real estate that allow the Donald Trumps of the world to evade paying taxes. But while we're at it let's get rid of the mortgage interest deduction as well---the most egregious real estate tax break of them all.