Repeal the Mortgage Interest Deduction

by James A. Bacon

The deduction of mortgage interest from the federal income tax reduced the United States tax base by about $470 billion in 2008. The tax break is justified as a tool to promote home ownership but, by overwhelmingly favoring upper-income Americans, it mainly encourages them to buy more, or more expensive, houses than they otherwise would. Renters with lower incomes who would like to become homeowners derive minimal benefit because they tend to be in lower tax brackets. So argues “Unmasking the Mortgage Interest Deduction: Who Benefits and by How Much?” published by the Reason Foundation.

As Congress wrestles with balancing the budget and restructuring the tax system, it should consider eliminating, or at least phasing out, this loophole. Zeroing out the mortgage interest deduction (MID) is certainly preferable to raising general tax rates, as some would like to do. Closing the loophole also would have the salutary effect of reducing the unproductive over-investment in residential real estate.

Authors Dean Stansel and Anthony Randazzo make several important points. The MID does little to promote home ownership. The chart to the left shows virtually no correlation between the MID subsidy and the home ownership rate since 1994. (Click on chart for more legible image.)

The reason is that non-homeowners, who tend to be Americans in lower tax brackets, would derive no benefit from the MID if they bought a home. The authors explain: “Lower-income taxpayers are far less likely to itemize deductions because the sum of those deductions would be lower than the standard deduction, and even when they do itemize, the incremental benefit over and above the standard deduction is often quite small. Furthermore, for those who do claim the MID, higher income taxpayers tend to benefit more because they face higher marginal tax rates and tend to have larger mortgages.”

The chart to the left shows how the benefit from the deductions goes overwhelmingly to the most affluent Americans. (Click on chart for more legible image.)

Realtors and home builders will defend the MID to the death because the loophole does stimulate the construction of bigger, more expensive houses as well as vacation homes. But no one has yet explained the social benefit of subsidizing the installation of Pella windows, granite counter tops and four-car garages. Nor has anyone articulated a compelling national interest for building more second homes in ecologically fragile beach fronts and wilderness areas.

Talk of raising the general federal income tax rate on “the rich” without eliminating the MID is just obscene. Such a policy would increase the value of the MID to the wealthiest Americans, encouraging even more over-investment in high-end housing and second homes.

In Bacon’s ideal world, Congress would figure out how to balance the budget without increasing the overall tax burden of the American people. Elimination of the MID would be offset in a revenue-neutral way by lower general tax rates. If people want to buy million-dollar McMansions or ski chalets in Vail, they’d still be free to. They just wouldn’t be subsidized anymore.

Share this article


(comments below)


(comments below)


21 responses to “Repeal the Mortgage Interest Deduction”

  1. Darrell Avatar

    Pretty simple really. The mortgage interest went up because house prices increased. They increased because the cost of houses due to city government interference caused them to increase. Meanwhile federal monetary policies allowed new forms of mortgage loans that were beneficial to homeowners moving up, allowing renters to buy their previous homes. And now some want to remove the interest rate deduction in some lame attempt to do what?

    Cause more people to dump their homes on the market? Just walk away from this corrupt system and let it burn?

  2. If the deduction were repealed, people would start an LLC and buy a house and rent it to themselves or engage in some form of cross-rental agreements. I suspect the creative accountants and lawyers would wind up building bigger loopholes that would likely shift the benefits higher on the income change. America’s problems are that it spends too much; has too many lobbyists; and too few people pay taxes, such that they think government is free.

  3. Darrell and tmt are right. Despite this argument i know that Without the mortgage deduction I would have rented much longer with little to show for it. We would wind up like Canada where mostly older people own homes.

    And if the mid mainly benefits the wealthy, this would affect them disproportionately, same as raising taxes only on the upper brackets. If the goal is to have everyone share the pain, this is not the way to do it.

    On the other hand if we expect the bottom 20% to pay their fair share, then we need to figure out how to get them more than 4% of the income, so they will have something to pay with.

  4. larryg Avatar

    I’m all for getting rid of interest deductions and especially so on houses.

    If you did that, you’d not have to worry about Fannie/Freddie and speculation.

    I am convinced that part of the housing meltdown problem that encouraged Alt A and No Doc loans was the fact that buyers would “gamble” that they’d sell the house for more than they paid for it and the interest deduction was the backstop / sweetner.

    Without that interest deduction.. speculation becomes much more riskier.

  5. Yes, but nine of that could have happened if the ratings agencies had not fraudulently rated the packaged loans.

    What happened in the financial meltdown. Had nothing to do with the mortgage deduction and everything to do with corrupt financing, long before the first dollar was deducted.

    Blaming this on the deduction is a sham argument.

    This strikes me as typical Larry. His home is probably paid for, so this represents yet another way lime tolls to get someone else to pay.

    1. propercharlie Avatar

      You haven’t a clue. The subprime crisis began the moment a loan was made to an individual who were too stupid to budget or live within their means. Ratings agencies had nothing to do with it. That was after the fact. You slander people, Hydra. If there was fraud who is being indicted?

  6. larryg Avatar

    Jim’s referenced charts tell the tale. the people who benefit most from the MID are those who build big or have a vacation home (orRV) or are basically speculating in certain types of housing – not the person struggling to own their first and only home for their family.

    there is absolutely no reason to give an interest deduction on a beach home or an RV or to someone who has bought 2 or 3 condos hoping to hold on to them for a while and then make a tidy profit.

    we are subsidizing something other than legitimate home ownership which is the reason given why we should allow the interest to be written off.

    What we ought to do is limit it to ONE HOME, a PRIMARY residence that costs no more than the median home price in a given area -and everything else you pay full boat for the interest.

    that would help the vast majority of people who want to own their home and shuck off those who are using that deduction as a business subsidy.

  7. Darrell Avatar

    Get rid of the interest deduction and you will discover how big the shadow inventory of homes really is, and how quickly fannie/freddy can go bankrupt.

  8. Groveton Avatar

    Oh what a tangled web we weave when first we practice to deceive.

    Or …

    We all become a bunch of goats when we let politicians buy our votes.

    There should never have been a mortgage deduction. However, there is one. Darrell is right about the effects of a sudden repeal of that deduction. However, it needs to go. Maybe set a drop off starting in five years where the deduction decreases by 10% per year until, in 15 years, it is zero. Fifteen years may sound like a long time but 1996 wasn’t all that long ago. Had we done this then – 2011 would be the final year of the phase out.

  9. Perhaps this is justified … and you can have my mortgage-interest deduction when you stop taking my money to fund greedy geezers with Social Security and Medicare. I bought my house in reliance on the mortgage-interest deduction as part of my economic planning, and it is no less unjust to pull that run out from under me than it would be to pull the rug out from under the elderly.

    Except for the fact that it is actually MY money, that is!

  10. Despite the bad economy, we are not broke, and there is plenty of work to do. Congress is like my hummingbirds, fighting over the feeder when there is plenty for everyone.

  11. What we ought to do is limit it to ONE HOME, a PRIMARY residence that costs no more than the median home price in a given area -and everything else you pay full….

    Idiocy. Wont work. Every home would become a rental so you can deduct the interest. And tying it to the median would start a race to the bottom.

    We have the interest deduction to create parity with the landlords. Once you go down this path you may as well eliminate all deductions. Sounds good in theory, but in practice I guarantee hoi wont like it. And while you are at it, you may as well eliminate zoning, which amounts to a subsidy for insurance. It ensures that you wont have to pay what it really costs to have the kind of place you want: same as the mortgage deduction does.

  12. Isn’t the deduction for second homes (e.g., the beach house or the mountain condo) limited to $100 K?

  13. James young: wont the geezers feel the same way about their planning as you do yours? They paid in for years to retire other people, and now you want to pull the rug out? Or how about the people who owned property for years while development occurred around them, only to be shut out by anti growth rules.
    Or people who invested in oil or wind or solar, based on profits expected on account of subsidies or tax breaks?

    Or people who paid insurance premiums for decades, for other peoples care, who get dropped when they need care?

  14. Groveton Avatar

    “Isn’t the deduction for second homes (e.g., the beach house or the mountain condo) limited to $100 K?”.

    I believe you can deduct the interest for a primary and second home to the extent of $1M of debt in total (in other words, $1M ceiling on both houses, not each house).

  15. Groveton – you are right, and I am wrong. I do, however, think that, if the deduction were eliminated, we would see purchase and leasing arrangements. If tax lawyers and accountants could not game that limitation, I would begin to wonder about their skills.

  16. I would begin to wonder about their skills.

    Love it.

    That is exactly the point, isnt it?

    Absent rules and regulations, someone will game the system, so we create regulations, and then people game the system differently. We hope the result is better.

    When it isn’t, we need different regulations, or more. But the Tea Party and darwinian economists think it is never better, which simply is not true. And there is another issue thay forget, which is time.

    The government can afford to absorb short term ineeficiencies for long term gains, and private enterprise cannot. Private enterprise will eventually give us 60 mpg cars, but it is not in their interest now, and it isnt even on their radar. So we have a regulation that says you will give us 60 mpg cars fifteen years from now.

    Germany has recycling laws that says products must be recyclable. That means they must be able to be be dissassembled for recycling, and that means they can be disaassembled and repaired. Voila, a regulation with unintended consequences.

    And those consequences will have echos in the US, even if we don;t have such rules.

    This asll starte with the buttons on the uniforms for the contintntal army. George Washington complained about the quality, and specifications were written. Next thing you know, $500 toilet seats.

    I’m sorry, private enterprise brings regulation on itself.

  17. larryg Avatar

    People who paid FICA taxes their whole working careers ARE ENTITLED to at least get it back but once again.. I point out that Medicare Part A is for hospitalization and is mandatory in terms of the FICA tax but Medicare Part B is VOLUNTARY … AND Heavily Subsidized.

    I’m in favor of removing the subsidy for BOTH the mortgage interest AND Medicare Part B (as well as ethanol).

    We have too many people expecting the govt to subsidize their activities when we are 14 trillion in the whole and there is no plan to pay it off and much arguing over who caused it but no one who tells the truth – that we all owe this money that we’ve already spent no matter how it got spent.

  18. People who paid FICA taxes their whole working careers ARE ENTITLED to at least get it back again ………..

    Well, Ok, but what if they get it all back again and they are only 80, then they live to 93?

    We have an old age lottery. Some people pay in their whole lives, die early and get nothing. Tough ta ta.

    We get that, and accept it. But this is far from the ponzi scheme the Darwinian conservatives claim it is.

    If anything, it benefits the rich who are likely to live better, get better
    care, and live longer. Why wealthy conservatives want to scrap SS is beyond me. But then, so is their opposition to universal health insurance, considering it is the best thing for entrepreneurs since nickle beer. Hell, I would have started my own business and quit my day job years ago, if I could get health insurance, at any price, and if I did not have to beg the county to let me do something, anything, other than farming.

    But, what happens when the actuarial data changes, and everyone who collects, collects more than they paid? Is not this the same as those that drive 50 miles and pay for 27?

    ( My receipts today were $200 and my expenses were $450, but I am still I’m production mode. The ratio will change in late fall.) I could easily do a lot better, and hire more people.

  19. WordPress is a mess.

    I chould do more and hire more people if I did not have to beg the county to allow me to do anything other than armkng


    In a time when people are having trouble paying their mortgages, homes are losing value, and the economy is in shambles, why would the government mess with a piece of the tax code that currently benefits the American homeowner? The idea of making the middle class pay for the errors of wall street is simply ridiculous. The mortgage interest tax deduction is as old as the modern income tax itself, and has helped millions of Americans afford their own homes. Reason itself is being sacrificed by this proposal it recovers nothing significant from the rubble of this recession. We are losing too many rights and freedoms to give up more!

    Historically, slow and steady is the way we’ve lost our tax advantages.
    Just look at the tax deduction for credit card debt.

    The middle class has given up enough already! Remember the good old days when we could write off interest on credit card debt? What we sometimes forget, is that this right was taken away in chunks. One action at a time, nibbled away. We need to keep the Mortgage Interest Deduction forever. We need incentives to buy homes to be sustained, not removed. We need to recover those construction industry jobs we lost. Say no to the madness proposed by Mr. Bruce Katz of the Brookings Institute.

Leave a Reply