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What will happen to the economy if we eliminate the deduction of interest on home mortgages?

Republicans want to close loopholes, but which ones? Closing loopholes on the rich will only provide a fraction of the money necessary to balance the budget. A middleclass loophole is the deduction of interest on home mortgages. Eliminate that and you do away with one of the major reasons for home ownership.

Once that loophole is closed look for resales to drop sharply, new home construction to stagnate and the average resale price of homes drop by 5% in the first year after the law is changed.

Suppliers who depend on home owners improving their homes or who rely on new construction will take a hit. We will see a spike in foreclosures.

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    Nov 13 2012: Speaking as a tax preparer, I can tell you that as it stands right now, very few people with less than $150,000 of income claim the interest deduction anyway, because their standard deduction is higher. Eliminating that deduction would have a negligible effect on the economy.
    • Nov 13 2012: Some other countries also have this deduction; Canada does not and they have about the same level of home ownership as we do. It really is a subsidy of the real estate market artificially inflating prices.

      In 2006 about 50% of Americans with an income between $50,000-$75,000/year took advantage of the deduction; those making less than that took advantage of the deduction less, those making over $75,000/year took advantage of it more often.

      I suppose it matters in part in how you define "middleclass". Clearly as income goes up so does those taking advantage of the deduction. Still, 35% of American making $40,000-$50,000 took advantage of the deduction which is still a significant segment of society.
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    Nov 11 2012: Yes, but none the less it is a subsidy on the other hand giving the government more money is like giving teenage boy alcohol and car keys.
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    Nov 12 2012: It will collapse sooner.
  • Nov 11 2012: "What will happen to the economy if we eliminate the deduction of interest on home mortgages?"

    A slight redistribution of wealth towards people with lower incomes since the deduction mainly benefits people with high incomes. The deduction does not have as much of an impact on the economy as it does (or did) in European countries where income tax rates and housing prices, relative to wages, are higher, so eleminating it won't have a very severe impact in the United States.