Sacred Cows: The Home Mortgage Interest Deduction

houseWell, here’s an article that will surely elevate Hugh Hewitt‘s blood pressure:

“Time to scrap the mortgage interest deduction,” by Philip Klein (h/t Hot Air):

In theory, the mortgage interest deduction is supposed to encourage home ownership, a questionable goal for government to begin with. The purpose of taxes is to raise money to finance government services, not to manipulate human behavior or economic activity.

Agreed, but reaching a societal consensus on that idea is going to take a long time to accomplish.

When lawmakers tell taxpayers that they can keep more of their money – but only if they spend that money the way politicians want – it’s just as much an exertion of government power as a spending program….

Of course.

Here’s the really interesting part:

[E]conomists Andrew Hanson, Ike Brannon, and Zackary Hawley….took a detailed look at the distribution of existing tax benefits for home ownership and found that the benefits do more to help wealthier Americans purchase larger homes than they do to encourage lower-income Americans who otherwise would be renting to purchase homes in the first place.

The study found that…80 percent of taxpayers earning more than $100,000 claimed the deduction, compared with just 25 percent of those earning less.

In monetary terms, the deduction is also significantly more valuable for higher-income households….

Furthermore, because high-income earners are taxed at a higher rate, each dollar of earnings they get to deduct from their taxes is worth more.

A family with a household income of $500,000 with $1 million in mortgage debt being financed at 4 percent would generate $16,000 per year in tax savings, according to the authors’ calculations. In contrast, a household earning near the national median income of $51,000 with a home worth $221,000 (the median price), would receive tax savings of one-tenth that amount.

So once again, good intentions end up benefiting the well-off, while the opportunity costs are paid by the less well-off.

My preferred approach would be to slowly phase it out over time as part of a broader tax reform that lowered tax rates for everybody.

A slow phase-out would be critical, since taxpayers generally base their long-term financial plans, particularly vis. major investments like a home purchase, in part on existing (and reasonably foreseeable) tax consequences.

Probably the best argument against phasing out the deduction would be the temptation for politicians to eliminate it without also reducing effective tax rates (preferably in conjunction with a flat tax).

Also, politicians like to be seen as “doing something,” so the impulse to tinker with a simplified tax code might well prove irresistible.

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