Why Should Tax Breaks Be for Poor OR Middle Class?

With the GOP tax cut proposals being bashed, ballyhooed, and bandied about Washington D.C., with some touting a victory for taxpayers and others lodging accusations that they benefit the wealthy in a heavy-handed manner, there's one plank of the legislation that could quite reasonably benefit the poorer segments of the nation. However, it, too, comes at virtually no cost to the wealthiest, but is instead placed squarely on the backs of the middle class.

What type of tax benefit pits poor against the middle class? In this instance, it's the loss or major reduction of the home mortgage interest deduction, which has provided significant tax relief to millions of homeowners. Currently, homeowners can deduct all of their mortgage interest paid out each year on mortgage loans of up to $1,000,000. (Note: The definition of "middle income" can vary even from one county to another, however, by any county's measure, a home loan of $1 million puts the borrower in the upper reaches of the middle income spectrum. So, the parties affected by this proposal cover a very broad definition of "middle class.")

[It is interesting to note that pundits and journalists alike have couched the mortgage interest rate deduction in terms describing it as "costing the Treasury $70 billion per year" as though  somehow there is a government entitlement to these assets.]

Increasing the Standard Deduction

Part of the proposed tax revision attempts to appease those at risk of losing their mortgage interest deduction with an ostensible doubling of the standard deduction. This, it is anticipated, will dissuade a significant portion of the nation that currently itemize their taxes, which includes deductions such as the mortgage interest, to opt for the standard deduction instead of continuing to itemize.

We say "ostensibly" because initial analysis by the Congressional Budget Office (CBO) points out that in spite of the "doubling" of the standard deduction, losses in other areas still result in a negative trade-off for the middle and lower classes. That is, these classes will now shoulder even more of the tax burden than before as some generous tax breaks are granted to the already exorbitantly wealthy. (Deducting your private jet? Just try that with your school supplies, teachers. College tuition: no breaks. Private school tuition deductions? But, of course.)

The NAR® Weighs In

The National Association of Realtors® (NAR®) has taken the following position on the tax proposals:

By nearly doubling the standard deduction while eliminating most itemized deductions, the bill would destroy or at least cripple the incentive value of the mortgage interest deduction (MID) for the great majority of current and prospective homebuyers, and sap the incentive value of the property tax deduction for millions more.

The direct result of these changes would be a plunge in home values across America in excess of 10 percent, and likely more in higher cost areas. Provisions in the bill that limit the deductibility of interest on new mortgage loans to $500,000, cap property tax deductibility at $10,000 for those who can still itemize, eliminate the deduction altogether for second homes, and restrict the utility of the exclusion of gain on the sale of a home would exacerbate the effect. Many of these changes are not indexed for inflation, increasing the pain on more and more homeowners over time.

What is gained by the poor or the young?

A lone bright spot for the lower income and younger individuals (although non-homeowners of all age and income levels could benefit) would be the increased standard deduction, because they accrue the benefit of it without losing the mortgage interest benefit.

So, on the one hand, millions of homeowners, who tend to be older and further along in their financial development, stand to lose not only tax benefits, but a possible reduction in their home values as well. On the other hand, younger and (generally) poorer taxpayers gain the benefit of the increased standard deduction, and they may reap some additional advantage in purchasing their first homes as home values decrease to the detriment of the middle class homeowners.

So, while Congress delivers billions in tax benefits to the wealthiest segment in corporate, estate, and other thinly, if at all, veiled bargain tax bonuses, the lower classes are left to squabble over the scraps.

Trickle-down economics anyone?

Brian P. Murphy, the author, is a researcher and writer for At Your Pace Online, an online provider through AYPORealEstate.com.