[Velshi:] You simply cannot have it all. There aren't many things the government can cut out of the tax code to boost revenue. Many of those things are relatively small tax breaks, but there are a few big things that do need to be considered. And one of them is the mortgage interest deduction that about 40 million of you have been claiming each year. Don't throw anything at the TV set. I know you like it. But it is expensive. And it doesn't really get the government or the housing market anything all that great. Many developed countries around the world do not have such a thing and they have higher homeownership rates than the U.S. does. Canada is one example. About 70 percent homeownership in the U.S. it's about 65. Canada gives you no benefit for buying a house. Don't worry, you've got the powerful lobbyists on your side, America, protecting this thing with everything they've got. And they may very well succeed in swaying lawmakers to not touch the mortgage interest rate deduction. But you need to know where it came from, who benefits from it and what it costs. So who better to explain that to us than Christine Romans. She joins me now. Christine, lay this thing out for us.
[Christine Romans, Host, Cnn's Your Bottom Line:] All right. It's one of the most expensive, Ali, of those tax goodies in the very dense and complicated tax code in America. We're talking about the mortgage interest deduction. It's the middle class' most cherished tax break. Government spending on this deduction will reach $100 billion by 2014, making it the third largest tax break on the books. But who is it really helping? The Tap Policy Center says it tends to benefit the upper middle class, upper middle class families the most. These bars behind me show income and the circles show the average savings for those with annual income up to $40,000. The average savings is a whopping $91 a year, Ali. But for those earning more than $250,000, their savings is much more significant, about $5500. Now critics say it's not helping to boost homeownership. Sixty-five percent of Americans live in a home that they own. It was up nearly about 70 percent during the housing boom in 2005 and 2006 but now we're back to the same levels we saw in the 1980s. Yes, the great recession is partly to blame but the fact is that we are stuck in this 64 to 69 percent range. Now, Ali, housing industry lobbyists are telling lawmakers, keep your hands off this deduction. You will hurt home prices, you will hurt the middle class. They say home prices would plunge immediately and sales could slow and independent economists, too, have said, look, you could see home process fall maybe 15 percent. This is really important on the coasts like Chicago, places where there are high home prices. Compromise might be the best solution here though, Ali, not cutting it out entirely. But lawmakers might cap it or limit how much you can claim. There is also talk if the president gets his tax increases on the wealthiest, maybe he'll just leave the mortgage interest deduction alone.
[Velshi:] Stay right where you are, Christine. Good setup for this. Christine, I want to bring in Kevin Hassett, he's a senior fellow and director of Economic Policy Studies at the American Enterprise Institute. He was a key Romney adviser during the campaign. Diane Swonk is also with us, she's the chief economist at Mesirow Financial, joining us from Chicago. Diane, let me start with you. The deduction is getting about $10 billion more expensive every year. But this is money in people's pockets. I mean Christine does outline that low-income people don't nearly get the benefit of this that high-income people do or high you know, high value homeowners do. But it is money in the economy. So what's the danger of pulling it out? What does it do to the economy or the housing industry?
[Diane Swonk, Chief Economist, Mesirow Financial:] Actually, at this stage of the game, I think the danger is fairly little. And I would limit the housing market deductibility. I wouldn't eliminate it entirely. One for pragmatic in reality, this is a it is a major transition. But I do think it needs to be major scaled back so that most Americans can benefit from it. But we really would rather have high income Americans investing in our future, in investment markets, in equity markets, things like that rather than in their homes. And if they can build multimillion dollar homes, you don't need a million-dollar deduction or a million one deduction and subsidizing that from the government. I don't think that's the best use of government policy. So there are a lot of arguments on both sides of the issue on deductibility. But I do think for the bulk of middle class Americans to be able to deduct is very important because this is their single largest asset that they hold and they actually do trade it in and hold it for a long period of time. And it is an asset. It is something they actually trade down into a condo once they sell it. So there is some justifications for deductibility there. But let's face it, you know, the high end doesn't neat this extra deduction and it's very distortionary. We don't want to over consume housing in this country.
[Velshi:] Right.
[Swonk:] When we should be consuming and investing in more productive assets.
[Velshi:] Kevin, good to see you, by the way, we haven't talked since before the election. Cutting deductions on the one like mortgage increase will increase the amount that people pay in taxes every year. One way or the other. It won't raise income tax rates. Something Republicans are against and it will hit, as Diane and Christine point out, wealthy Americans a little harder. Where do you think Republicans come down on this?
[Kevin Hassett, Senior Fellow And Director Of Economic Policy Studies, Aei:] Well, really, the mortgage interest deduction is about the worst designed part of the tax code. You know, it's tax candy for "Bobos in Paradise." It doesn't get anybody into a home. It pretty goes to people who are going to own a home anyway and encourages them to instead of investing in the future of America have, you know, an addition to their home or something like. And so I think Diane is exactly right. What we need to do is pair it way back. You know, if you have a big tax giveaway over here, then that means you need to have a higher tax rate over there. And I you know, for me, I think what Republicans would like to do is pair back cuts like this. You know, as Romney proposed, you may recall, and then use the revenue from that to get a lower rate. And I think that the right way to structure the mortgage interest deduction really is to eliminate the deduction altogether but replace it with a refundable credit. So that if you're a low-income person who's actually the true person at the margin of owning a home, you know, then either you might not have a very high tax rate but if we give you a generous tax credit for the first bit of interest then it might get you into a home. That's the way to subsidize homeownership, not to give this big giveaway to rich people who are going to have a house anyway.
[Velshi:] Kevin, I'm disappointed you didn't you didn't cite Canada. You know, we got You always bring up Canada.
[Swonk:] That's right.
[Hassett:] Yes. We do that every time.
[Swonk:] Yes. Yes.
[Velshi:] Some new data shows that home prices are up 3.6 percent from this time, you know, compared to this time last year, the third quarter of this year compared to the third quarter of last year. New home sales did dip a little bit. But that's less than 10 percent of the market. Now here's the concern, if we kill the mortgage interest rate deduction, or scale it back or do something with it, what's the follow on effect to the housing market? That small part of the housing market that is where the jobs are all created because we are really we've talked about the growth in new homes being this golden lining around the economic cloud that we're under.
[Swonk:] Well, I think you need to take it in the context of the current economy. First of all, rents are so much higher than the marginal cost of homeownership even before deductibility. That it is now encouraging people to buy homes to flip to rent for those people who can't get in or qualify on a mortgage rather than just leaving those homes on the market. So it's triggered demand. It's still cheaper even without the deductibility than renting to actually buying. So I think that's very important. So you're eliminating some of that movement and some of that cushion on the housing market at a time that it's not necessary anyway. Because you'll still have a lot of activity. And you still have a lot of pent-up demand. Also, ultimately what really matters here is we need to balance our budget deficit.
[Velshi:] Yes.
[Swonk:] We need to reduce the debt in the economy to reduce interest rates. Lower interest rates over the long haul are much more important at holding housing prices high and affordable than mortgage deductibility.
[Velshi:] Yes.
[Swonk:] I'd much rather have it coming through responsible fiscal policy.
[Velshi:] Right.
[Swonk:] And giving a boost to housing prices that way and asset prices that way than having it come it through these distortions of over consuming high-end housing.
[Velshi:] Let me ask Christine this. There are some other deductions I want I want to show our viewers and their expected costs by 2014. All right? In a year, in the mortgage interest, about $1 billion. Income taxes, $54 billion, charitable contributions $50 billion, property taxes $27 billion, medical expenditures a little over $26 billion. These are things
[Romans:] You forgot the 401 [k], too.
[Velshi:] And 401 [k]. A huge one.
[Romans:] Yes.
[Velshi:] It'll that's 401 [k] like mortgages all of these things, there are arguments in favor of keeping them because they do certain things. Others will say it's social engineering, right? We have this mortgage tax deduction that's supposed to get people to buy houses. But as Kevin does point out, it's unclear whether it really does.
[Romans:] Well, I mean, the whole tax code is a whole experiment in social engineering, isn't it? I mean, I mean, Diane was talking about the distortions that these incentives make, especially for high-end housing and the like. But I mean that's what it is. And it's been just 86 since the last time we had a meaningful revamp of the tax code.
[Velshi:] Yes.
[Romans:] It's really it's a big it's a big, big mess. You also have lobbyists, Ali. What I want to bring here, too, is that we talk we're having this very measured discussion about the benefits and the drawbacks of the mortgage interest deduction. But there are lobbyists who are very forcefully giving a very different picture than what we're seeing right here in Washington. And they do and have had the ear of policymakers for a very, very long time. So I wouldn't count them out. They say a 15 to 20 percent decline immediately in home prices. That's something that most elected leaders don't want to have happen to their constituents.
[Velshi:] Yes. And even if it's It feels bad. Feels bad to take something. By the way, the housing lobby you're talking about has spent $25 million this year in telling Congress don't touch this deduction or bad things will happen.
[Romans:] Yes.
[Velshi:] Hey, Diane and Kevin, great to have you back on the show. Good to see you both. Christine, thanks so much. Listen, maybe we're having the wrong discussion about taxes entirely. I don't think it really should be about what rate you pay as it should be about what return you get for the taxes you pay. Do you think you are getting a good return on your taxes? I think some of you are going to say you don't. But if you don't, don't ask the Europeans for any sympathy because they are paying substantially more, substantially higher tax rates than you are and they're getting less for it. So are Europeans getting ripped off or are you getting a bargain? Think about that. I'll tell you on the other side.