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Forbes.com

 

On Charity And Mortgage Interest: Obama Mistakes His Wife For A Hat

March 18, 2014

By Howard Husock

It’s just an aside in the White House budget for 2015—but it’s a very revealing one. In making the case for capping, at 28 percent, the "value of itemized deductions and other tax preferences . . .for the wealthiest Americans", the President declares: "Currently, a millionaire who contributes to charity or deducts a dollar of mortgage interest enjoys a deduction that is more than twice as generous as that for a middle class family."

The White House is certainly right that the small minority of Americans who itemize their tax returns can take advantage of such deductions. But he is profoundly wrong to conflate the deduction for mortgage interest with that for charity. In doing so, the President, in an apparent zeal to increase taxes on the wealthy at all costs, sees no difference between one deduction (mortgage interest) that distorts our housing market and favors the interest of specific interests (such as homebuilders), and another which provides revenue for organizations ranging from homeless shelters to universities. Or, put more simply, the White House mistakes a policy which allows someone to help himself to a bigger house with one which provides a modest incentive for helping others. It’s a mistake so basic that it reminds one of the famous Oliver Sacks book, "The Man Who Mistook his Wife for a Hat".

Indeed, those who are generous with their charitable donations should certainly not feel they must defend both deductions. To understand why, it’s important to understand what’s right about the charitable deduction—but, also, what makes the mortgage interest deduction not worth defending.

The White House is, in fact, right to seek to cap its value further (it already applies only to interest on mortgages larger than $1.1 million)—and would be even better advised to limit it further still (as per Rep. Dave Camp’s tax reform proposal, to limits its application to mortgages only up to $500,000). The President should do so because he is, indeed, right that the deduction provides private benefits for the wealthy—but little public benefit. Long inviolate because of its supposed value in promoting homeownership, there is little evidence that it does so. Not only do other nations, such as Canada, which lack such a tax code provision enjoy home-ownership rates similar to those in the U.S., but, as economists Ed Glaeser and Jesse Shapiro have written, "the home mortgage interest deduction is a particularly poor instrument for encouraging homeownership since it is targeted at the wealthy, who are almost always homeowners." In other words, helping the wealthy to buy a McMansion really isn’t good public policy. Meanwhile, the only time in recent decades when the homeownership rate increased significantly occurred in the run-up to the financial crisis—when too many who could not afford a home at all (and likely did not itemize their taxes) were drawn into homeownership. To make matters worse, the existence of the mortgage interest deduction gives fodder to those who argue that direct housing subsidies for the poor should be further increased—even though housing vouchers, as I’ve written in City Journal, include none of the encouragement for work and upward mobility that reformed cash welfare has provided since 1996.

All this stands in sharp contrast with the charitable contributions made by the same wealthy who might avail themselves of the mortgage interest deduction. Their contributions to the $217 billion in household charitable giving are significant; indeed, only 21 percent of the value of charitable gifts comes from donations of those who do not itemize their tax returns. And, as Williams College economist Jon Bakija has noted, households with income above $200,000 themselves account for 29.5 percent of the aggregate value of all charitable donations. That’s why the current White House proposal to cap the value of the charitable deduction would, as the American Enterprise Institute’s Arthur Brooks has found, likely lead to a substantial drop in overall giving—a drop of up to $9.4 billion. Such a drop would, as I wrote for the Manhattan Institute, be disproportionately concentrated in high-tax "blue" states, where there are so many high-income households with high tax bills.

It’s important to keep in mind, what’s more, where the billions contributed by the wealthy to charity actually go. A 2012 Bank of American/Indiana University study of "high net worth philanthropy" found that 79.6 percent of high net worth donors support education; 79.3 percent support "basic needs" for the poor (think food pantries); 68.8 percent support the arts; and 65.5 percent support health organizations (think both cancer research and local hospitals). Certainly such donors derive some modest personal benefits from such giving—perhaps a plaque at their alma mater, or the social status that comes with being on the board at the art museum. But that’s simply not the same as a subsidy which helps one buy a bigger house on a bigger lot—and it’s hard to believe the White House can’t tell the difference.

A serious Obama Administration would be endorsing proposals, such as that of Rep. Camp to limit the mortgage interest deduction, or that of the Congressional Budget Office to convert it to a tax credit, so as to extend its benefits to a broader economic cross-section of Americans. It would not use the flaws of the mortgage interest deduction to take a cheap shot at philanthropy.

Original Source: http://www.forbes.com/sites/howardhusock/2014/03/18/on-charity-and-mortgage-interest-obama-mistakes-his-wife-for-a-hat/

 

 
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