Bailout

Re-examining the mortgage interest deduction

By Felix Salmon

One of the positive effects of the deficit commission report is the way that it has brought the stupid mortgage-interest exemption back into the spotlight. David Kocieniewski’s article in the NYT is very good, although I don’t understand why simple statements of fact have to be attributed to anonymous “experts” or “economists”:

Tax policy experts say that for all its popularity, the value of the deduction in public policy is debatable. It was intended to encourage homeownership, but housing economists point out that countries like Canada and Australia, which do not allow mortgage interest deductions, have homeownership rates similar to those of the United States.

In my ideal world, Kocieniewski would also have mentioned the substantial downsides of high homeownership rates, as well as the experience of the UK, which abolished mortgage-interest tax relief in 2000, only to see house prices skyrocket afterwards.

But the broad thrust of Kocieniewski’s article is clear: the mortgage-interest deduction costs $131 billion a year, none of which goes to renters or to people who have paid off their mortgage, and all of which goes to people in the top 1/3 of the income distribution. There’s nothing fair about it at all, and in these straitened fiscal times, we’ve surely reached the point at which we have to abolish it somehow.

Given that the increased tax burden would fall disproportionately in the blue states of California, New England, and New York, you’d think that this might be something that even Republicans could get behind, but sadly I believe Kocieniewski when he says that “Congress would probably not consider it except as part of a major overhaul of the tax code.” Or, technically, when he says that tax policy experts say that Congress would probably not consider it except as part of a major overhaul of the tax code.

The problem with this kind of attribution is that it sets up a he-said-she-said equivalence between those tax policy experts, on the one hand, with people like Nancy Pelosi, on the other, who slammed the idea as a tax hike for the middle class.

In any case, I’d love to see some numbers on just what proportion of the middle class takes advantage of this deduction. And why it makes sense that $131 billion should be directed to that particular subset of the middle class, rather than to everybody on a similar income.

Full post as published by Macroprudential on November 14, 2010 (boomark / email).