51% of Americans Pay Zero Income Tax: Get Ready for DC to Target the Home Mortgage Deduction

Texas Senator John Cornyn is aflutter over this factoid: 52% of Americans pay zero income tax, he says?

Say what? That’s way higher than I would ever dream!

The Joint Committee on Taxation, which scores the cost of tax legislation for Congress, pointed this out in a recent report.

The committee’s report further showed: While 22 percent of taxpayers owed no income taxes, about 30 percent were refunded enough that their net income increased, thanks to special types of tax credits that mostly go to people earning less than $30,000 a year. (The largest such credit is the Earned Income Tax Credit, which cost the government about $55 billion in 2010.)

Some say these “refundable” credits are building blocks of the welfare state, but I wonder, given the complexity of the tax code, how anyone without a CPA can even figure out how to get them. In any case, the high unemployment rate may have inflated this figure and experts estimate that in normal times, 35 to 40 per cent of households owe no income tax. Cornyn argues that we need to clean up these wasteful tax credits before we tax “the rich.”

Of course, the rich have many other loopholes to choose from. And guess where fingers are being pointed: the mortgage interest deduction. The Tax Policy Center says this nifty deduction provides the largest benefits to taxpayers earning more than $200,000 a year. Could be because of deductions on second homes, of which there are about 10 million in the US. And it cost the government $103 billion in 2010.

So now our definition of “rich” has become those who make $200,000 a year or more?

” …the bottom 20 percent of income earners score (save) about $1,000, on average, through the tax code. Middle-income households use tax breaks to reduce their tax liability by an average of $4,000. The top 1 percent of taxpayers — the very rich — reduce their tax liability by nearly $275,000 on average.”

I would argue that the home mortgage tax deduction is used more by middle-income households.

According to the Tax Policy center, getting rid of the estimated $1 trillion in tax breaks would still fall on the backs of the poor: the bottom 20 percent of households would see tax liability increase 275 percent, whereas the top 20 percent would pay about 41 percent more.

I give up. We’ve woven ourselves into a web so complex, I do not even know where to begin unravelling.

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  • Before they institute an across-the-board elimination of the mortgage deduction, perhaps they should start with second homes only. The perception, at least, is that would target the wealthy. This deduction can also help offset property taxes. Of course, while I agree that some tax burdens are spread disproportionately, another distressing problem is that too many people are spending more than they can afford. Too often, when applying for a mortgage, the extra costs, like taxes, interest, maintenance (including the unexpected) are glossed over, and people are encouraged to buy the most expensive house they can afford — on paper, at least. (Not to mention buying the most expensive cars, clothes, vacations, etc.) The ability to display wealth has become a measure of success, and it has caused people to overextend.

    By no means am I defending the tax code. Any document that is that long is beyond ridiculous. And a knee-jerk elimination of a deduction that makes sense for so many, and that people bought their homes relying on, will create more problems than it solves. For starters, suddenly being without that deduction would be a huge, unexpected hit even for those who are financially responsible. Removing, or reducing, the dedcution on second homes could create significant revenue while sparing those making a modest living who own one home — their residence. If those affected people then cannot afford a second home because they no longer receive a deduction, at least they still have their primary home.

    • I think you're right Lucy.

      Maybe they could at least phase it out, like this:

      Anyone taking the deduction now can keep taking it on their primary mortgage for their primary residence so long as that mortgage is outstanding (so, you would lose it if you refinance). No one not currently taking it, can ever take it again.

      That should not hurt anyone who relied on it; and it should get the government out of the business of encouraging a potentially bad behavior. At the same time, all the 2nd mortgage/home deductions go away. And, in an orderly fashion, so do all the primary deductions.

  • Before they institute an across-the-board elimination of the mortgage deduction, perhaps they should start with second homes only. The perception, at least, is that would target the wealthy. This deduction can also help offset property taxes. Of course, while I agree that some tax burdens are spread disproportionately, another distressing problem is that too many people are spending more than they can afford. Too often, when applying for a mortgage, the extra costs, like taxes, interest, maintenance (including the unexpected) are glossed over, and people are encouraged to buy the most expensive house they can afford — on paper, at least. (Not to mention buying the most expensive cars, clothes, vacations, etc.) The ability to display wealth has become a measure of success, and it has caused people to overextend.

    By no means am I defending the tax code. Any document that is that long is beyond ridiculous. And a knee-jerk elimination of a deduction that makes sense for so many, and that people bought their homes relying on, will create more problems than it solves. For starters, suddenly being without that deduction would be a huge, unexpected hit even for those who are financially responsible. Removing, or reducing, the dedcution on second homes could create significant revenue while sparing those making a modest living who own one home — their residence. If those affected people then cannot afford a second home because they no longer receive a deduction, at least they still have their primary home.

    • I think you're right Lucy.

      Maybe they could at least phase it out, like this:

      Anyone taking the deduction now can keep taking it on their primary mortgage for their primary residence so long as that mortgage is outstanding (so, you would lose it if you refinance). No one not currently taking it, can ever take it again.

      That should not hurt anyone who relied on it; and it should get the government out of the business of encouraging a potentially bad behavior. At the same time, all the 2nd mortgage/home deductions go away. And, in an orderly fashion, so do all the primary deductions.

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  • I am so old I can barely remember 1980 when real estate investment deductions where drastictically phased out to individuals with an AGI over $100,000. The result was the disposition of of properties and a real estate value free fall for half a decade.
    Cut out or even a phase out interest deductions will turn real estate values downward for decades, let alone eliminate a majority of future homeowners.
    This really gets to the bone of 49% of the people paying for 51% of the populace. As 51%increases they will vote and control and take more of the money of the reducing 49% populace. Change is slow in democracies, but I sure don't like what see in the future

    Sorry , but this does relate to Dallas real estate values in the future.

  • I am so old I can barely remember 1980 when real estate investment deductions where drastictically phased out to individuals with an AGI over $100,000. The result was the disposition of of properties and a real estate value free fall for half a decade.
    Cut out or even a phase out interest deductions will turn real estate values downward for decades, let alone eliminate a majority of future homeowners.
    This really gets to the bone of 49% of the people paying for 51% of the populace. As 51%increases they will vote and control and take more of the money of the reducing 49% populace. Change is slow in democracies, but I sure don't like what see in the future

    Sorry , but this does relate to Dallas real estate values in the future.