> From: James Devine <[EMAIL PROTECTED]> > Subject: [PEN-L:11500] mortgage interest deduction > According to Joseph Pechman's FEDERAL TAX POLICY (1977: 289), the US > Federal Income Tax exempted _all_ personal interest payments from taxation > from the start of the modern income tax (1913). I guess the major interest > group in favor of this would be the banking capitalists and kindred spirits. (BTW, there are more recent editions of Pechman.) The interest deduction under the personal tax is distinct from a similar provision on the corporate side. It's not clear how important this was for persons since as I noted the personal income tax did not become a mass tax until WWII. > Rather than being a policy that was instituted all at once, therefore, the > mortgage tax deduction is a break that survived a series of tax hikes. I'm Don't forget a rate hike can make the MI deduction more valuable since it 'clears' taxable income subject to a higher marginal rate. > pretty sure that it was in the 1980s that we stopped being able to deduct > interest on car loans, etc. The upper middle and upper classes were able to > resist the extension of this to mortgage interest. It was the 1986 reform. I think it is imprecise (not the worst sin in the world) to depict this as an upper-middle class thing since it affects the well-being of anyone who owns a home. > I still don't think that this tax break was any kind of deliberate effort > to co-opt the working class. The bosses lucked into getting that result, to > the extent that it actually happens. A more interesting and grosser abuse flowing from the MI deduction is tax arbitrage. Investors are able to deduct interest expenses under the personal income tax. This means you could borrow money (say, by taking a home equity loan, or just getting a loan on some other collateral) to buy stock, enjoy capital gains that is taxed at preferred rates (soon to be 20%), but deduct your interest costs against income subject to the top marginal rate (39.6) on "ordinary" income. This would be even more lucrative if we had gotten indexation of capital gains. If we had better tax enforcement such practices could be monitored and prevented, but at present there are no appreciable obstacles. Is this a great country or what? Cheers, Max "People say I'm arrogant, but I know better." -- John Sununu =================================================== Max B. Sawicky Economic Policy Institute [EMAIL PROTECTED] 1660 L Street, NW 202-775-8810 (voice) Ste. 1200 202-775-0819 (fax) Washington, DC 20036 http://epn.org/sawicky Opinions above do not necessarily reflect the views of anyone associated with the Economic Policy Institute other than this writer. ===================================================