Politics in The Hague is in a shambles. That means it’s time to start discussions about mortgage interest relief again. Parties like the PVV, the VVD and the CDA want to preserve the current fiscal arrangements for owned homes. Left-wing parties want to adapt the system and some of them even want to scrap it altogether. Jan Bouwman, professor of tax law, and Jan bij de Leij, lecturer in tax law, are staggered that there is so little attention paid to fiscal legal norms by political parties. As far as they are concerned, change is definitely on the way.
Leaving the fiscal regulations concerning owning a home as they are is just not an option, according to Bouwman. ‘There’s no doubt that in the long term mortgage interest relief is going to be a problem because it places too great a strain on government resources. In the current system, an owned home falls into box one for tax purposes. In the same box, owners qualify for mortgage interest relief. One long-term option would be to make the interest deductable at a fixed percentage, say thirty or forty percent. In that case the benefit of the interest relief would be the same for higher and lower incomes and there would be less loss of tax revenue for the government.’
Another option would be to limit the time you qualify for mortgage interest relief, thinks Bouwman. ‘It’s currently possible to get interest relief for thirty years. Even reducing that to 25 years would make a huge difference.’ Bij de Leij thinks the current system is a monster. ‘An owned home shouldn’t be in box one at all. When income tax was introduced, mortgage interest relief was squeezed into the system any old how. Usually you only find income from actual activities in box one. An owned home should be in box three.’
Bij de Leij thinks the most promising solution would be to include the debt in box three but not the actual house itself. ‘I think there’s a lot to be said for this. After all, a caravan or a car are not automatically included as possessions, but if you have taken out a loan for them, you can include the debt, and in principle qualify for four percent interest relief.’
Whatever the political result of this discussion, it is important to take sufficient time to introduce the new measures. Bij de Leij: ‘It’s good that we’re thinking about it now, but with the current crisis in the housing market now’s not the time to introduce such a regulation. That would only deepen the crisis.’ Another important point is to indicate in plenty of time when the new regulation will come into force. ‘If people don’t know where they stand, they will become cautious and the net result will be a stagnant market. You can only introduce a new system when economic activity is on the up.’
Bouwman also sees the dangers of a stagnant housing market. The revenues from scrapping mortgage interest relief in his opinion should ideally be used to reduce the transfer tax or even scrap it. ‘That would stimulate movement in the housing market, which is good for the economy.’
With a period of transition it’s impossible to avoid the two systems operating alongside each other for a number of years. Bij de Leij is thinking of a transition period of about thirty years. Bouwman is more in favour of a period lasting ten years. ‘After all, the aim is to change certain behaviour patterns. You really want people to pay off their mortgage if they borrow money for a house. At the moment some people are only paying the interest in order to qualify for interest relief.’
The effects will be the hardest for people who have bought a house in the last five years, thinks Bouwman. ‘The question is whether they will still be able to satisfy their obligations if the house prices fall as dramatically as predicted once the mortgage interest relief is reduced. They will then see their house fall in value and their costs rise because they can claim back less.’
There are two sides to the coin for first-time buyers, expects Bouman. ‘If mortgage interest relief is no longer an option, first-time buyers will be less inclined to join the housing market because they will not be able to afford it. On the other hand, it’s perfectly possible that house prices will fall dramatically – percentages of as much as fifteen percent are being bandied about. That would lower the threshold for buyers.’
Prof. J.N. Bouwman (Winsum, 1959) studied Economics of Taxation at the University of Groningen. He is a professor of tax law at the Faculty of Law of the University of Groningen.
J.L. bij de Leij LLM (Stiens, 1955) studied tax law at the University of Groningen and is a tax law lecturer at the same university.
For further information, please contact Jan Bouwman, e-mail: j.n.bouwman rug.nl or tel. 050-363 57 26, or J.L. bij de Leij, e-mail: j.l.bij.de.leij rug.nl or tel. 050-363 57 34
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