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A bill by Minnesota's Rep. Keith Ellison would cap the mortgage interest deduction at the first $500,000 of a home loan and use the anticipated savings to invest in low- and moderate-income housing.
March 18 -
The current U.S. tax code represents decades of political manipulation rather than any grand design, and can certainly be improved upon, but only a tax neutral pro-growth tax reform can prevent the deficit from spiraling out of control. Hence tax reform should favor saving over consumption and productive work over leisure, but otherwise be neutral, allowing capital and labor to flow to their most productive use.
March 20
The mortgage interest tax deduction is often
But such support is misplaced. Over 64% of the MID tax benefits go to tax filers earning more than $100,000, according to
Our study examines the economic effects of the mortgage interest deduction in addition to assessing the tax breaks policy effectiveness. We argue that, considering the political hurdles that full repeal might create, policymakers should instead seek to replace the MID with a fixed $900 credit for all taxpayers with a mortgage.
The purported public policy role of housing-related tax deductions and credits is to increase homeownership. But as currently structured, the
Of the 65.2% of tax filers claiming to make less than $50,000, a mere one in ten claims the mortgage interest deduction. One reason that low-income and many middle-income taxpayers are unlikely to use the MID is that the standard deduction is likely greater than any itemized expenses. Unless annual mortgage interest expenses, combined with any other expenses that are allowed as itemized tax deductions, are greater than the standard deduction, a taxpayer will not opt to itemize deductions. According to data from the Internal Revenue Service, it is only after reaching $100,000 in income that three-fourths of tax filers use the MID.
Other countries also demonstrate an inconclusive relationship between the MID and homeownership. In the case of the
Much of the justification for owner-occupied housing subsidies focuses on encouraging individuals who would not otherwise have sufficient savings to acquire home equity. Yet as Yale economist
The MID could likely be eliminated with minimal effects on low- and middle-income taxpayers. Only a full repeal of tax-favorable housing policies in exchange for lower marginal tax rates for all taxpayers will eliminate economic inefficiencies. Elimination of the MID in exchange for lower marginal rates and a higher standard deduction would represent a general improvement in the standard of living for almost all low- and middle-income taxpayers.
This hypothesis has already been proven by the The Tax Reform Act of 1986, which significantly reduced the value of the MID by reducing marginal tax rates and increasing the standard deduction. The lower tax rates significantly diminished the use of the MID by lower-income households, although the reduction in use was not quite as great for high-income households.
Eliminating the MID may slightly decrease the demand for housing among some low-income households that actually have sufficient mortgage interest to itemize. But this decrease seems relatively small, given that the MID is used so infrequently by low-income households. The bulk of the decrease in the demand for mortgage debt would come from households with large loans that exceed the loan limits of Fannie Mae and Freddie Mac.
A cleaner tax code would also move the housing industry away from its current tax-driven overvaluation. Revenue-neutral tax reform that eliminated the tax bias toward housing might encourage higher-income households to shift some housing investments to more socially productive investments, such as stocks or bonds.
If tax-favored housing must exist, it should, at a minimum, promote homeownership among low-income and middle-income households. A successful tax-favored housing policy would be designed to encourage households at the margin to purchase a homethat is, those homeowners who would like to own homes but would not do so without a federal subsidy. For example, offering a fixed, nonrefundable $900 credit to people who have a mortgage could increase homeownership among low- and middle-income households by as much as 5%, while only decreasing homeownership rates among high-income households by 1%.
By reforming the MID from a deduction to a credit, the purported policy goals of supporting homeownership would be more properly aligned with actual outcomes. A cleaner, simpler tax code brings more equality to investment opportunities and is a step toward greater tax fairness.
