November 03, 2017
There are many reasons to object to the Republican tax cut plan. Most importantly, the corporate tax cut is likely to primarily benefit shareholders, with little impact on investment; the elimination of the estate tax is a gift to the very richest people in the country; and the 25 percent tax rate for rich people on the income they receive from pass-through businesses is both a huge gift to the very rich and an enormous growth incentive for the tax shelter industry.
But one complaint is largely ill-founded. The limit of the mortgage interest to payments on $500,000 in principal is not likely to have much negative impact on middle-income households. While the NYT tells us that people buying “starter houses” in places like New York City and Silicon Valley are likely to be hit, this impact is likely to be minimal. This can be seen with a bit of arithmetic.
Ife we assume that someone buys a home with 10 percent down, then a $500,000 mortgage would go along with a house that sold for $555,000. According to the Case-Shiller indices, this would put you well into the top third of houses in the New York City commuter zone. (The cut-off is $480,000 in the most recent data.)
Furthermore, it is only the interest on the principle above this amount which is no longer tax deductible. Suppose someone has a $600,000 mortgage (enough to buy a $670,000 home, assuming a 90 percent loan to value ratio). They would be able to deduct the interest on $500,000 in principle, but not the last $100,000. If they paid a 4 percent interest rate on their loan, this would be $4,000 in lost deductions. If they are in the 25 percent bracket, this would amount to an increase of $1,000 in their taxes.
While this amount is not trivial since this person is paying $24,000 a year in mortgage interest alone (taxes and principle almost certainly raise housing costs above $40k a year), their income is almost certainly well over $100k a year, so this is not a moderate-income household. Furthermore, as the principal is paid down, a greater portion of the interest is tax deductible, as the outstanding principle falls to the $500,000 cutoff. In short, it does not make sense to claim this limit is a big hit to middle-income households, even in areas with high-priced housing.
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