The commission headed by Alan Simpson and Erskine Bowles to find ways to cut deficits doesn’t put it the way I do in the title, but one of their proposals may have that effect.

The proposal, which  may not get enough votes to make it to Congress, is to end the tax deduction for home mortgages.  As reported by The New York Times:

The proposed simplification of the tax code would repeal or modify a number of popular tax breaks — including the deductibility of mortgage interest payments — so that income tax rates could be reduced across the board. Under the plan, individual income tax rates would decline to as low as 8 percent on the lowest income bracket (now 10 percent) and to 23 percent on the highest bracket (now 35 percent). The corporate tax rate, now 35 percent, would also be reduced, to as low as 26 percent.

In an ideal world, it would make sense to have lower income tax rates and fewer deductions, a much more simplified system which would encourage people to be productive by lowering the cost of earning money.

But we do not live in an ideal world.  We live in a world in which residential real estate has been priced based on the availability of tax-deductible mortgages.  Remove that favored treatment for home ownership and housing prices will adjust downward, significantly. 

Limiting the change to higher value homes would not really help, because it is that segment of the market which is most dependent on the mortgage interest deduction.

To make such a change now, even if phased in, very likely would take down the banking system, which is struggling with an inventory of bad mortgages and under-water homeowners.

Simpson and Bowles may be right, they’re just decades too late.

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