Making the Case for Mortgage Interest Deductibility
Is it even worth the fiscal risk?

by

D'Arcy E. Barker
CHARTERED FINANCIAL PLANNER
REGISTERED EMPLOYEE BENEFITS CONSULTANT
http://www.barkermoney.com

The Right Honourable former Prime Minister, Joe Clark (in 1998), and 2004 Conservative Leadership Contender, Belinda Stronach (in 2004), both have supported a particular method to cut taxes. This particular tax-cut idea is not new and it was certainly bounced around back in 1979 when Joe Clark briefly served as Canada’s Prime Minister. It is the idea of mortgage interest deductibility.

The idea has instinctive appeal. Many Canadians have a mortgage, and it is a big chunk of a family's household cash-flow each month. If a family could deduct those interest payments from income tax, wouldn't it make the actual cost of a mortgage virtually nothing (from an after-tax perspective)?

The answer is yes, and that's the problem. Canadians pay mortgage interest because they made the difficult long term decision to assume significant debt. This is not a costless or a riskless decision, and no government policy should make Canadians think that it is (costless and riskless). When major decisions are made to look costless or riskless, or at least highly subsidized, people make bad decisions.

To build capital through home ownership is a good decision. But mortgage interest deductibility does not encourage this accumulation of capital it encourages the accumulation of debt. As it rewards people for piling ever greater amounts of money into mortgages, the cost of housing rises and the need for such debt subsidization to the middle class grows ever more necessary. American reformers brave enough to try to remove mortgage interest deductibility from the U.S. tax code bear witness to the vicious and irreversible cycle such a policy can create.

And we should all worry about the long term health of the middle class. A strong middle class has always been the backbone of stable economies and free societies. But the middle class prospers not simply if some professions earn decent incomes, but when such people begin to accumulate wealth beyond its debts. Personal and family debt is already a serious enough problem in this country without further debt subsidized through mortgage interest deductibility.

If public policy makers really want to help the middle class in the long run, wouldn't it actually make more sense to encourage mortgage principal deductibility? In other words, shouldn't we subsidize people to accumulate wealth, not debt? But don't we already have a tax exemption for capital gains on principal residence, and special RRSP provisions to allow for interest free, tax free borrowing for a mortgage? So what is the point of all these policies, and why do we need a new one?

The preferred alternative to which policy makers should pay heed is to just cut general Canadian income tax rates and let Canadians decide what their own preferences are for how they spend their own money? Why is it that, even as they propose to cut our taxes, politicians try to create tax preferences to tell Canadians how they think they should be spending their money?

Politicians who have been involved in the last 30 years, and potential politicians who want to be involved in the next 30 years, should be careful about promoting the “accumulation of debt”. After all, this is what Joe Clark's generation of politicians did when they were in government, piling up a national debt worth over half a trillion dollars in "other people's money."