On the Mortgage Interest Deduction

December 27, 2010

Ask anyone on the Hill, and they'll tell you the mortgage interest deduction (MID) is a third rail that no one -- not fiscally conservative Republicans or social goal of homeownership supporting Democrats -- wants to touch.  It's ironic because the MID is fiscally very irresponsible, and doesn't help the progressive goal of expanding affordable homeownership, says Anthony Randazzo, director of economic research at the Reason Foundation.

So why do we have it?  The MID comes out of politically motivated tax policy.  And it has stayed in place on similar concerns.  But what has been the result? 

If the overall goal was to promote homeownership, then the data point to a social failure (on top of the inherent fiscal failure of the tax policy), says Randazzo.

  • According to Christian A. L. Hiber and Tracy M. Turner, the MID only boosts homeownership attainment of higher income households in lesstightly regulated housing markets.
  • In more restrictive places -- typically larger coastal cities --an adverse effect exists.

This indicates the MID is a failure from the progressive perspective.

Additionally, the MID isn't about the government taking less income -- it's about giving money back to homeowners to reduce their net tax liability.  Having the government only take 10 percent of your income instead of 30 percent is a tax cut.  However, having Uncle Sam take 30 percent, but then cutting the tax bill down based on the dollar figure of particular interest paid by a specified type of American is not a real tax cut.  And it's not fiscally conservative.  The government certainly does not have a right to all money, but arbitrarily finding ways to deduct tax liability is actually redistributionist -- especially since this tax deduction favors owners over renters.

Thus, the MID is also a failure from a conservative perspective, says Randazzo.

Source: Anthony Randazzo, "On the Mortgage Interest Deduction," Reason Foundation, December 14, 2010.

For text:

http://reason.org/blog/show/on-the-mortgage-interest-deduction

 

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