SIEGEL: It seems that the number of people, when they're asked about this in polls -- do you support the mortgage interest deduction -- the number of people who say they support it vastly exceeds the number of Americans who actually use it. Does that square with your numbers?Dr. SMITH: Yes, yes, it does. Actually, we find that two-thirds of the people living in apartments support mortgage interest deduction. I think that may very well be because homeownership in this country is sort of the American dream and everyone sees the advantage of the current system.
SIEGEL: On the other hand, there are potentially tens of billions of dollars per year that the Treasury could recover by reducing what they now describe as this tax expenditure. If everybody is getting cut, why shouldn't people with mortgages?Dr. SMITH: Well, there's a lot of money on the table, no doubt about that. We think, however, that there are a lot of social advantages to having a nation of homeowners. We've recognized this since Thomas Jefferson. And people who own houses tend to have better financial situations; their children tend to do better in school. There are all sorts of social advantages to society as a whole as well as the obvious economic advantages.
SIEGEL: If indeed the purpose of all this is to achieve the social good of homeownership, how does that include the second home? I mean, do we think -Jefferson didn't think in terms of having the beach house, the condo in Vail.Dr. SMITH: Well, when you get into the second home, you get into a whole bunch of other issues related to tax law, ways of doing business and so forth, the renting the home out, et cetera. And so that's a totally different type of business. And then you have to look at this in terms of does it make economic sense, and it appears to be that way. But right now the major emphasis has been on the first home and we really haven't gotten into that other issue.
SIEGEL: And tell us what kind of proposal is most likely to be a reform, not elimination, of the home mortgage interest deduction.Prof. WHEATON: Well, I suspect that the proposal most likely to emerge out of the Senate committee is one where the interest on second homes is eliminated, one where the total amount of mortgage debt will be capped at a lower level than the $1 million that it's currently capped at, and, rather than having an interest deduction where the deduction ranges from 15 percent all the way up to 38 percent for very wealthy Americans, will be a constant 10, 12 or 15 percent in the form of a tax credit.
SIEGEL: Now, let's explain that. You're saying the reason that the benefit of this deduction ranges from a low to a high rate is it depends on how big your income is and what rate you pay your taxes at.Prof. WHEATON: Oh, absolutely. And every American who earns more than $150,000 or $200,000 is subject to 35 or 38 percent tax rates. So they're deducting it at that rate, meaning they're only paying 62 percent of every dollar of mortgage interest they actually pay. Uncle Sam is basically picking up the other 38 percent.
SIEGEL: Now, what do you say to people who are in the real estate industry who would say, look, it's depressed right now, the housing market is in terrible shape, it doesn't seem to be picking up, to do anything that would harm it, it's the wrong time to do that?Prof. WHEATON: I would say it really depends on what you do. The housing market's current straits is really due completely to the foreclosure crisis. And that just keeps dumping houses on the market. And the problem is there's not enough first-time buyers left in the current situation to absorb those houses once they get in the market. And I'm not sure that the interest deductibility of mortgages will have much of an effect on that because a lot of that's entry-level buyers, and they're the ones who are not really very much affected by this proposal.