Lower the Maximum Balance
Right now, the mortgage interest deduction can be claimed by anyone whose mortgage balance is less than $ 1 million. Does someone who can afford a mortgage of $900,000 really need help from the government? Probably not. And there's an awful lot of interest that can be deducted with a mortgage of that size. So one way cut the cost of the mortgage interest deduction would be to limit the size of the balance on which it can be claimed.
One reasonable limit might be a $500,000 threshold. Most middle class Americans aren't buying homes that will result in a mortgage balance of much more than that. The precise balance that should qualify can be debated, but it's pretty obvious that $1 million is far too high.
Create a Maximum Income Threshold
While lowering the maximum balance that qualifies for the credit would help, it wouldn't be a perfect solution. What if Bill Gates had a home worth many millions of dollars, but his mortgage balance had declined to $500,000? He could then deduct his mortgage interest, even under the revised limit above.
Clearly, someone who is making millions of dollars per year doesn't need the government's help to pay for a mortgage. Consequently, an income limit to claim the deduction would be a good idea. Defining that limit is also something that could be debated, but the $250,000 per year threshold might be a popular option. High earners can afford to pay for their mortgage interest in full, so why is their homeownership being subsidized?
There's nothing objectionable about either of these ideas. Unless of course, you're an anti-itemized deduction zealot (like me, sorta) and you want to get rid of all itemized deductions anyway.
And since this is a redundant hobby horse post, what about the Bush tax cut extension? David Leonhardt has some suggestions about how Democrats can plausibly compromise, including the most obvious idea ever:
A MILLIONAIRES TAX Right now, the 400,000th dollar earned by a surgeon is taxed at the same 35 percent marginal rate as the four millionth dollar earned by a hedge-fund manager. This makes little sense, and it runs counter to how the tax code worked for much of the 20th century.Duh. I'll never understand why the Democrats didn't take at least this idea up before the election. Anyway, hopefully in the lame duck we can get some traction on the LeBron James-Goldman Sachs Millionaires' Tax.
The top brackets once distinguished between the merely affluent and the truly rich. In 1960, for example, the top marginal rate (of 91 percent) started at $400,000, which is the equivalent of almost $3 million today.
Congress could take a small step back in this direction by extending all the Bush tax cuts for households making less than $1 million a year. At the same time, though, a new tax bracket would start at $1 million. The marginal tax rate could be 39 percent, which was the top rate under Bill Clinton. The Financial Times recently endorsed such a plan. It would probably cost something like $30 billion a year, rather than the $60 billion for extending all the upper-income cuts.
Lest you worry about millionaires, they’d still be doing just fine. They would indeed get to keep part of the Bush tax cut — that part that applied to their first million dollars of income. Their total federal tax rate would still have fallen far more in the last three decades than the rate for any other group. And millionaires have received much larger pretax raises over that time than the middle class or the poor.