Each year we produce the State Business Tax Climate Index, which promotes tax competition between the states and motivates policymakers to reform their tax systems toward pro-growth policies. Over the past few years, the...
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- Mortgage Interest Deduction Forever?
Home Mortgage Interest Deduction Forever?
One of the toughest issues facing federal tax reformers is how to deal with the deduction for home mortgage interest. Economists almost uniformly deride it, but homeowners, builders, and their representatives in Congress uniformly embrace it.
What's wrong with it? For one, interest payment deductions carved some $323 billion out of the federal tax base in 2000. Not only does it distort investment decisions toward housing at the expense of computers, education and other investments that may boost productivity more than homes, but it forces taxpayers to bear higher tax rates as a result.
Some sound thoughts on the deduction from the July/August issue of The American Enterprise:
The home mortgage deduction is an equally knotty problem, even for people who like to reduce taxes. Economists tear their hair at the exemption, arguing that it encourages over-investment in housing at the expense of capital investment. “Workers with a computer in front of them are $15,000 more productive than workers without them,” says Stephen Moore, president of the Free Enterprise Fund and a proponent of the flat tax. “You just don’t get those kinds of productivity improvements from investing in housing.”
Many argue that homes will remain affordable under a consumption tax because people will have more income to spend. “Canada doesn’t allow mortgage deductions and it has similar levels of home ownership,” says Edwards of Cato. But it is unlikely that either the Tax Panel or the President will venture into this dangerous territory.
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The Tax Policy Blog is the official blog of the Tax Foundation, a non-partisan, non-profit research organization that has monitored tax policy at the federal, state and local levels since 1937. Our economists welcome your feedback. If you would like to send an e-mail to the author of a blog post, please click on that person's name to locate his or her e-mail address or visit our staff page here.