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InsiderOnline Blog: August 2011

A Damaging Deduction

Eliminating the mortgage interest deduction would be a big plus for the economy, and might even help more people afford to buy a house, too, say Dean Stansel and Anthony Randazzo. Their new Reason Foundation study (Unmasking the Mortgage Interest Deduction: Who Benefits and by How Much?) observes that most of the deductions are claimed by those who can already afford to buy a house anyway:

The authors explain:

Those households that rent but would prefer to own a home—if they had just a bit more financial flexibility—are typically low-income families. As such, even if they bought a home they would be much less likely to itemize their deductions and unlikely to claim the MID. As a result, rather than increasing the homeownership rate, the primary impact of the MID is to increase the amount spent on housing by consumers who would choose to own anyway, subsidizing spending on housing rather than homeownership.

Stansel and Randazzo point to studies estimating that getting rid of the mortgage interest deduction would lower house prices by between 3 percent and 10 percent—quite possibly putting more people within reach of homeownership than the deduction does.

And, as the authors point out, the deduction has been implicated as a culprit in the housing bubble. The favorable tax treatment encourages investment in housing rather than other assets that might be more economically productive. And the deduction encourages house buyers to rely on debt-financing, which makes them more vulnerable to the ups and downs in the housing market.

Eliminating these distortions would help the economy, as would broadening the tax base to allow for lower tax rates. The authors calculate that average tax rates could be 8 percent lower without reducing government revenue if the mortgage interest deduction were eliminated.

Posted on 08/05/11 01:37 PM by Alex Adrianson

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