New Research Highlights Flaws in the Mortgage Interest Deduction
July 1, 2014
A recent study by Jason Fichtner and Jacob Feldman of the Mercatus Center shows that the mortgage interest deduction (MID) mostly benefits those in upper income brackets.
The MID allows taxpayers to deduct interest paid on their mortgages from their income tax. The purpose of the MID was to expand homeownership for the middle class. Instead, it has encouraged debt and borrowing by Americans that can already afford houses. Fichtner and Feldman found that:
- Sixty-four percent of the benefits, measured by effective tax reduction, goes to households earning over $100,000.
- Of the 65 percent of taxpayers with incomes of $50,000 or less, less than 10 percent use the MID, as they typically do not pay enough in mortgage interest expenses to justify itemizing deductions rather than using the standard deduction.
- High earners save almost ten times more than lower earners using the deduction.
- The MID encourages high-income earners to purchase homes up to 20 percent larger than the homes they would have bought without the deduction.
- The United States has a lower homeownership rate than countries without any mortgage interest deductibility.
- Home prices have increased by 10 to 15 percent due to the MID.
Fichtner and Feldman suggest repealing the MID in order to reduce the economic distortions created by the tax deduction regime. If repeal is politically infeasible, the authors suggest establishing a fixed $900 credit for having a mortgage, which could increase ownership rate while reducing tax code complexity.
Source: Jason J. Fichtner, Jacob Feldman, "Reforming the Mortgage Interest Deduction," Mercatus Center, June 19, 2014
Browse more articles on Tax and Spending Issues