Should we reform the mortgage interest deduction?

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November 13, 2015

In this week's Republican presidential debate, candidates were asked about their tax plans. Ben Carson’s response, which highlighted simplifying the federal tax code to “get rid of all the deductions and all the loopholes,” specifically called for the elimination of the mortgage interest deduction.

I’d agree that the mortgage interest deduction needs an overhaul. But I favor reforming it, not altogether eliminating homeownership subsidies.

Why is reform needed? Let’s let the facts tell the story. 

The mortgage interest deduction (MID), which allows interest paid on mortgages up to $1 million to be deducted from taxable income, is expensive. It cost the country nearly $70 billion in 2013.

Who are the winners? The clear answer is high-income people.

Over 70 percent of the MID benefits go to the top 20 percent of income earners. The next 20 percent receive much of the rest—nearly 20 percent. Where does this leave the 60 percent of Americans who are on the middle and bottom rungs of the income ladder? They get a mere 9 percent of the benefits. In dollar terms, roughly $63 billion goes to the top 40 percent of income earners, while $1 billion goes to the bottom 40 percent.

The government should help reduce inequality, not exacerbate it. 

mortgage interest deduction

And what does this mostly high-income targeted spending buy us? Not much in terms of homeownership. There is little empirical evidence that the MID increases homeownership.

If the goal of the MID is homeownership, it's poorly designed. The MID does not provide direct subsidies that help people with the initial purchase and associated costs. Rather, it subsidizes the ongoing debt associated with owning a home. Subsidizing debt can encourage people to take on more debt and buy bigger, more expensive homes.

What to do? Reform the MID to limit current deductions and use the revenues to provide a credit for first-time homebuyers. Such a reform would be more progressive and would subsidize the home purchase, not the debt incurred. More efficiently and equitably promoting homeownership, and thus wealth building, can help more people get a toehold into the middle class and increase economic mobility.

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