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prosperity and mobility. Opponents call it inefficient and unfair. Proponents describe it as an essential bulwark of middle-class by taking away the mortgage interest deduction going forward?" Critics use the same data to argue that the MID has inflated home values artificially—to the benefit of a small group of affluent home- owners, and the detriment of those trying to enter the market. Their claim has some basis: In 2007, only 28.5 percent of tax filers took mort- gage interest deductions, and almost 40 percent of those were in the $50,000–$100,000 income bracket. Another 33 percent reported incomes more than $100,000. Only 18.4 percent made less than $50,000. The reasons for that imbal- ance are found elsewhere in the tax code: The MID is only available to taxpayers who itemize deductions, and those are disproportionately higher-income earners. The result is a subsidy for people who, argu- ably, don't need it. As Toder explains, "The cur- rent deduction, the way it's structured, gives no benefit to the 65 percent of taxpayers that don't itemize their deductions. The incentive that it does give to itemizers is very variable, depend- ing on your income. If you're in the 15 percent bracket, you get a 15 percent subsidy; if you're a higher-income person, in the 35 percent bracket, you get a 35 percent subsidy. So, you're providing a kind of upside-down or backwards subsidy for homeownership—largely going to people who would be homeowners no matter what you did with the tax system. So instead, what you're doing is making it less expensive for them to buy bigger houses." Proponents would argue that, of course, tax carveouts generally benefit the well-off, because they're the ones who pay taxes. And many moderate-income homeowners don't deduct mortgage interest because they don't need to: The standard deduction is high enough that itemizing doesn't make sense. Meanwhile, millions of renters receive no benefit at all. At the macro level, some economists say the MID causes a misallocation of capital by encouraging overinvestment in real estate relative to other, more productive ventures. Yun 82 disputes this, noting that investors aren't rush- ing to invest in housing, even with today's low prices. "The reality is that housing has never taken capital away from investment," he argues. If there were ever a time for that to happen, he points out, "Today would be a perfect opportu- nity, where one can see piles of cash sitting in company accounts." Perhaps the most cogent argument for the cap down from $1 million to $500,000 is just disastrous in any major urban area, and particularly on both coasts." Even the deduction for second homes has a rationale, according to Goold. "A third of the counties in the country have at least one community where more than 15 percent of the housing stock is second homes," she says. "And in some counties, that goes up to as high as 40 and 50 percent. And so we can't see any good reason for eroding the value of property in those communities by taking away the deduc- tion. And remember, not every second home is a ski chalet in Aspen." There are also laudable strategic plans behind many second-home purchases. As Goold notes, "For a fairly good part of the market, their second home is their anticipated retirement home." What's Ahead? The future of the MID will depend on retaining the MID is simply that it exists—and as Yun likes to point out, millions of Americans have made financial decisions based on that. Even the most vocal opponents acknowledge that any changes would need to be phased in over a long period to minimize their impact on a fragile housing market. In lieu of eliminating the deduction outright, various ideas have been proposed to limit its reach. The National Committee on Fiscal Responsibility and Reform, popularly known as the Simpson-Bowles Commission, issued a report in 2010 that included several suggestions: 1) Convert the deduction to a 12 percent non-refundable credit available to all taxpayers (not just those who itemize); 2) Cap the applicable mortgage debt at $500,000; 3) Eliminate the deduction for second homes and equity lines. In 2011, the bipartisan group of senators known as the Gang of Six tackled the issue again, reviving the idea of a $500,000 cap, and the exclusion of second homes. President Obama's 2013 budget does not the economic climate—and who's in power in 2013. Few observers expect any quick policy shifts. And few politicians would be rash enough to tip their hand on such a hot-button issue before an election. Toder says, "I would be surprised if anything happened over the next year or two. But if you look at the longer picture in which the long-term budget is going into deeper deficit as the baby boomers retire, and the cost of retirement and health programs increase, there's going to need to be some adjustment in our fiscal position. It's not sustainable in the long run. And since raising tax rates is an unattractive option, I think people are going to look harder at what are called tax expen- ditures. And some of the things that were off-limits in the past may be reconsidered. But that's a long way from saying it's about to happen." Goold is equally guarded. "Congress is go- address the MID directly, but calls for limiting itemized deductions to 28 percent for high- income earners. While these proposals have generally been ignored by lawmakers, they've generated strong pushback from the housing industry. Linda Goold is tax counsel for the National Association of Realtors. "When that million-dollar cap was put in place," she observes, "the median price of a house was $72,000. If that cap had been adjusted for inflation, it would be almost $2 million now. $1 million bought you a lot of house back in 1987. Now, the geographic unfairness of cutting ing to undertake tax reform," she says. But she cautions, "If the goal of tax reform is to lower the rates, it's not clear to me that Congress can succeed because the only way that they can lower the rates as much as they want to is to go after provisions that are of enormous benefit to the middle class. All of the money in these so-called tax expenditures is in mortgage interest, retirement savings, and employer-paid healthcare benefits. And I think that when push comes to shove, the public at large may be very unwilling to give up those provisions in order that a small class of richer people can have a tax cut." And that sums up the status quo, which remains stubbornly resistant to reform of any sort. As often happens in Washington, this game could end in a stalemate.

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