Home mortgage interest deduction is regressive

Allowing tax deductions for home mortgage interest payments is a popular loophole in the US tax code but its history in other countries, and analysis of whether it actually creates home ownership and connectedness to the community, makes its supposed benefits seem hollow. Regular policy blogger Mathew Goldstein argues that the MID's lopsided benefits for the already-rich make it regressive and a candidate for reduction or capping -- and ultimately, removal from the tax code.

 /By Mathew Goldstein/ Like a 12 hour watch running counterclockwise that displays the correct time twice a day, we can expect our current president to endorse a sensible policy at least once or twice a year.  He recently proposed a change to tax policy that, if implemented, would reduce one of the largest and most dubious of the tax loopholes disproportionality favoring wealthy people.  Will we, as progressives, take this ball tossed our way and run with it even though it now has the name "Trump" printed on it?

Most developed countries do not allow a deduction for interest on personal loans.  Countries that allow a home mortgage interest deduction (MID) have created an exception to this rule.  In addition to the United States, the Netherlands, and Switzerland allow this tax deduction, and four other countries allow a small part of mortgage interest payments to be deducted (Belgium, Denmark, Ireland, and Sweden).

A rationale for the deduction is that home ownership gives people a bigger stake in their community.  Many people, most of them far from wealthy, own homes and take advantage of the MID.  Eliminating this tax deduction is therefore unpopular and seldom promoted by elected officials from either political party.

Examining Denmark's reform of the MID in the 1980s, a recent study concluded that a sharp cut in the preference for top-rate taxpayers (with smaller changes for other taxpayers) had a "precisely estimated zero effect" on homeownership, even in the very long run. The deduction resulted in people living in bigger houses and borrowing more.  Homeownership rates in the United States remained relatively constant from 1965 through 2000 even though the value of the MID had fluctuated.  Canada and the United Kingdom have homeownership rates similar to that of the U.S., even though they don’t let borrowers write off the interest on their mortgages.  Those studies that have concluded the home MID increased homeownership reported only small effects.

The MID is regressive because it is worth more to high-rate taxpayers than low-rate taxpayers.  It shifts the personal tax burden from owners to renters and from owners of expensive properties to owners of modestly priced properties.  In 2013, 73 percent of the $70 billion in tax deductions went to the wealthiest 20 percent of earners; 15 percent went to the richest 1 percent. The poorest 20 percent, who rarely own homes, got essentially nothing.  It increases financial instability by encouraging risky borrowing, an ongoing problem in many countries, including the United States. It favors the spread of suburbs over the growth of cities, which promotes more extensive human disruption against the natural environment.

The MID is unpopular among economists because it is widely deemed to promote unproductive and counter-productive economic outcomes.  When setting government economic policies, including tax policy, a top priority consideration should be the effect of the policy on our economy.  Accordingly, we should follow the expert consensus.  Neither the popularity of the home MID, nor the partisan or political identity of the people who endorse reducing or eliminating the home MID, nor narrow self-interest, should take precedence over a rational, evidence based, cost versus benefit, technical analysis for the country.  The best policy would be no tax deduction for mortgage interest and accordingly that is the goal to advocate for.  But if lowering the loan cap for the deduction from its current 1 million dollars is all that is achievable at this time then that becomes a fallback goal.


Mathew Goldstein is a regular contributor to the PM BlogSpace. He lives in Bowie.