In the event the federal tax code really does get Simpson-Bowleserized by the next Congress, elimination of the ever-beloved mortgage-interest deduction may not be unthinkable, says Amity Shlaes–or even be a bad idea:
Opponents of deduction abolition today argue that abolition will make the market crash some more, . . . . One could argue this the other way. Now Americans see houses for what they really are: boxes that depreciate. This is therefore the least expensive time to abolish the deduction. We have already taken the hit — and 2012 is also the time when we most need the $100 billion or so from the elimination. [Emph. added]
Am missing the holes in her logic! The experience of the past few years demonstrates that the government’s policy of encouraging homeownership for its own sake is (ahem) not without drawbacks, and may even cause more harm than good. The interest deduction distorts the market by puffing up values, mainly to the benefit of upper-income types. So swap it for a lower overall tax rate, and then phase in the elimination over five or so years to keep the housing market from going haywire. Even without deduction, housing figures to be an attractive long-term investment for many families. You have to live somewhere, after all. There aren’t many assets you can leverage four to one and plan on holding for years on end. . . .