Is the Mortgage Interest Deduction in Jeopardy? (Part -1)

Is a tax deduction the most efficient and equitable way to accomplish goals

The deduction, whether it accomplishes its goals or not, is hardly the most efficient mechanism for doing so. The mortgage interest deduction confers the highest benefits on those who would probably buy homes anyway: the wealthiest segments of society. Economists James Poterba and Todd Sinai figured that it saves about $523 per year for those earning between $40,000 and $75,000, and $5,459 per year for taxpayers earning over $250,000. Those with the lowest incomes don’t generally itemize, so they get no benefit at all from the tax deduction.

While it is true that homeowners with larger and relatively young mortgages who itemize deductions do enjoy the tax benefits of an interest deduction (mortgage subsidy), subsidies for home ownership are of questionable value in increasing homeownership. If we are to have subsidies, as a means of increasing homeownership, it makes more economic sense to target those with lower incomes in a way that those benefits could actually be realized. Perhaps a better way would be to replace the deduction with a tax credit so that the benefit can be accessed without the need to itemize deductions and does not increase disproportionately for higher income earners who are not in need of subsidies to afford homeownership.

Next week we will look at the actual proposals of the Bi-Partisan Deficit Reduction Commission and what is likely to happen.

Until then… May the Market be with you.

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