Mortgage Interest Deductibility: An Unfair Subsidy for the Rich

The National Association of Realtors claim that “any changes to the mortgage interest deduction (MID) would de-value homes…[and] trigger yet another crisis in home values.” Repealing the MID would mean attacking the “most sacred tax break in the code.” [In fact, however, our current] housing tax policies fueled the housing boom and exacerbated the bust. The MID played a particularly insidious role in the crisis by explicitly promoting over-investment in housing. “Buy as much house as you can,” real estate agents urged clients. “The more you buy, the bigger your tax break.” Words: 821

In further edited excerpts from the original article* Dennis J. Ventry Jr. (www.ssrn.com) goes on to say:

Mortgage Interest Deductibility Hurts American Competitiveness
More mortgage debt meant lower taxes, such that the deduction began effectively subsidizing gambles on fluctuations in housing prices. As such, the MID amounts to a huge subsidy that causes massive efficiency-draining distortions in the economy. The most sure-fire way to improve the competitiveness of the American economy is to repeal the mortgage interest deduction.

Mortgage Interest Deductibility Worthless for Low and Middle Income Households
The MID is as inequitable as it is inefficient. It is the quintessential “upside-down subsidy: the greater the need, the smaller the subsidy.” It provides 10 times the tax savings for households with income exceeding $250,000 compared to households earning between $40,000 and $75,000. It is effectively worthless for low- and middle-income households, such that repealing it would significantly increase the progressivity of the income tax.

Mortgage Interest Deductibility Favors Taxpayers With Income in Excess of $100,000
Recent research also indicates that the long-touted but unproven putative social benefits associated with
homeownership and the policies propping it up remain unsubstantiated. It has been reported that the benefits from the MID and the deduction for property taxes are distributed as follows:
a) 4% of taxpayers with income below $50,000
b) 22% of taxpayers with income over $50,000 – $100,000
c) 73% of taxpayers with income above $100,000.

Mortgage Interest Deductibility Is of Minimal Benefit to Majority of Americans
Such disproportionately skewed benefits belie claims of the housing industry that the MID “is an important factor promoting broad-based home ownership.” In fact the MID does not help:
a) 65% of taxpayers who take the standard deduction,
b) nearly 50% of all homeowners,
c) 22% of mortgaged homeowners,
d) low income households and only minimal benefits to
e) middle-income households,
f) renters or
g) the elderly who either are no longer servicing mortgages or who have too little income to receive any benefit.

Mortgage Interest Deductibility Has Almost NO Effect on Home Ownership Rate
Indeed, if promoting homeownership is the desideratum of U.S. housing policies, then the MID is a terribly inefficient and inequitable vehicle. Experts are unanimous in that the MID has “almost no effect on the homeownership rate.” Policies promoting homeownership “should seek to increase the number of homeowners,” and “should emphasize the purchase decision, not the quantity decision.” Any tax subsidy “should be only the minimum amount necessary to switch people from renting to ownership, and it should not be available for anyone who would buy a house anyway.”

Repealing the MID would not affect housing prices nearly as much as special interests, such as the National Association of Realtors, claim. Moreover, the downturn would be largely temporary and would be focused on big, expensive homes. If policymakers were concerned about preserving artificially inflated home values for sellers of large, overpriced homes, the repeal could be phased-in over several years.

The Mortgage Interest Deductibility Should Be Eliminated
Eliminating the MID would:
a) only minimally affect rates of homeownership, and, again, only temporarily,
b) accelerate the buildup of home equity,
c) increase the saving rate
d) help households absorb income shocks and, most importantly,
e) make homes less expensive.

A Homeowner Tax Credit Would be Preferable to Mortgage Interest Deductibility
Using the money saved from repeal ($108 billion in 2010) to fund a tax credit rather than a deduction would positively promote homeownership. Unlike the MID, a tax credit for homeowners could be independent of home value or size of debt, which would prevent excessive borrowing and precariously high loan-to-value ratios, precisely the problems that fueled the current housing and financial crises. In addition, a home credit could be capped and indexed to prevent households in high-priced areas from receiving disproportionately large subsidies.

A home tax credit would be a considerably more progressive policy than the MID and simplify the tax code reducing the number of itemizers, and partially rationalize the treatment of homeownership under a net income tax that currently fails to tax imputed rent. Most importantly, converting the MID to a tax credit would influence the decision of millions of ordinary Americans to own versus rent, thereby substantially increasing the rate of homeownership nationwide.

*www.ssrn.com/abstract=1498784

Editor’s Note:
- The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
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