Ben Stein weighed in on the looming fiscal cliff yesterday during one of his op-ed pieces on CBS’s Sunday Morning. While I may somewhat agree with Mr. Stein on his main thesis, I can’t help feeling a little skepticism about his actual motive.
Most often Mr. Stein’s diatribes extol the virtues of fiscal conservatism and the joys of being rich in America. Yesterday Ben definitively and categorically rejected what was long suspected to be one of Mitt Romney’s hidden revenue increases, eliminating the mortgage interest deduction. He also quoted his dead economist father quoting some obscure 18th Century politician saying essentially that politicians are idiots. Not exactly a news flash.
The mortgage interest deduction isn’t universal and isn’t specifically mentioned in the constitution. When the tax laws were amended in 1913, all interest was deductible At the time, home buying was not a significant part of our economy. Most countries do not allow a deduction for the interest paid on home mortgages, in some countries mortgages are non-existent. Home purchases are funded by families and friends through personal loans and gifts. In Chicago’s China Town and surrounding neighborhoods like Bridgeport it is more common than not for home buyers to borrow the money from the community itself, which sees it as a way to strengthen neighborhoods and community ties.
Stein’s argument was cogent and logical and it makes sense that eliminating the mortgage interest deduction could have negative impact on a very fragile housing market. As with every argument, though there is a flip side here, as well. Since the meltdown (remember 2008?) rents in metropolitan areas have skyrocketed while home prices have fallen drastically, making them not only more affordable, but an attractive alternative to renting. Besides that, interest rates are at their lowest levels in most of our lifetimes, making home mortgages as reasonable as they’ve been in decades.
As most of us know, mortgages are amortized in a way that collects most of the interest in the early years of the loan, making any interest deduction miniscule toward the end of the loan. Moreover, a deduction for a 3.5% loan is much less significant that it would be for a 5.5% or 7% loan and most of those higher interest loans are moving into the diminishing interest/increasing principle zone.
A reasonable alternative might be something quite unpalatable for House Republicans; like a COMPROMISE. It could be time-based or interest rate-based or a combination of the two. To encourage home buying, leaving the deduction in place for the first three years of new mortgages (not re-fi’s) is reasonable as is a deduction for mortgage interest in excess of 5.5% or 6%. I’m just making suggestions here, what do I know about trillion dollar things? Maybe the president could raise his cutoff definition for “rich” to $500K or $1M, although the actual amount right now is closer to $300K than $250K.
As for Ben Stein’s ulterior motive, I have no idea if the fact that he has somewhere between 6 and 11 houses (depending on your source, I believe it’s closer to 11 than 6) had any influence on his sudden interest (pun intended) in mortgage deductions. I wouldn’t even know who to ask. Bueller? Bueller?