Inside Financial Services

WHAT’S THE POINT OF THE MORTGAGE INTEREST DEDUCTION, AGAIN?

In the event the federal tax code really does get Simpson-Bowleserized by the next Congress, elimination of the ever-beloved mortgage-interest deduction

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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. . . .

3 Responses to “WHAT’S THE POINT OF THE MORTGAGE INTEREST DEDUCTION, AGAIN?”

  1. Parkite

    …..over the NAR’s dead body. They are a desperate organization whose membership will stop at nothing to preserve the status quo.

  2. What he said

    Yes, the NAR values the mortgage interest deduction almost as much as they do bad haircuts, combovers, and too much makeup.

  3. Wayne Carr

    The public policy argument for the mortgage interest deduction is fairly weak. The idea is ostensibly that it incents homeownereship. Leaving aside why the government should put its thumb on the scales to skew housing preference patterns, mortgage interest is not tax deductible in Canada, Australia or the U.K. all of which have homeownership rates roughly equal to ours, so why is this tax expenditure anything but a boondoggle? If the government wants to incent homeownership, a highly debatable proposition, a tax credit for first time homebuyers would be a cheaper and more efficient way to do it. Until it goes away, however, I will continue to claim the deduction FWIW because I hate paying taxes.

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