The law of unintended consequences applies here.
It’e never as simple as “hey here’s a 20K tax loophole, let’s close it and get $20K in additional revenue”. It never works out that way.[/quote]
I agree with your central premiss that it is not a 1 for 1 reduction. That people will make changes to reduce their tax burden, which will distort the amount of money coming into the government coffers.
But I also think you are missing some of the counter point subtitlies.
1) yes, consumption will decrease for current households that pay the extra costs. However, lower housing prices will make housing a smaller part of monthly outlays of new households, increasing the amount of money available for future consumption from new households. It may take a few years to make up the difference, but new households generally consume more than older ones.
2) There are many many tax breaks, and people will shift around to take advantage of other breaks. The idea that ending this will result in a 19000 loss to the average tax bill (in this sinario) isnt totally true either. (Perhaps cheritable giving would rise, and that has social and economic advantages too.)
3) Your assumption about people renting out their place and then renting another confuses me. In your example of the wealthier subset, 800k loan on a ~1million+ property with 250k income results in a monthly ‘loss’ of about 1600/month. But what is renting in that subset? Most Million dollar houses I imagine are renting in the 6-8k per month catagory in san diego. But a loan on 800k at 5.5% is only about 4500/month. So they are gonna pay say 6k in rent costs, to make 6k in rent, which they have to pay income taxes on? That extra income tax would eat up alot of the extra ‘savings’ by renting, plus add in the hassels and costs of being BOTH a renter and a LL.
4)Imagine two months were you are still a renter, but dont have a tenant. Kiss your ‘savings’ goodbye.
I am not convinced the majority of people making this kinda money are going to do what you propose. Maybe there would be a small savings there, but isnt is always bantered about that a small ‘ownership premium’ is a small price to pay?
So, in the end I think it would be a net advantage to the Federal government, and a near cost neutral one to states, as lower property taxes are meet with generally increasing sales tax income; in the long run. For people already stuck with high housing interest, they may be SOL.
