Trophy-House Mortgage Interest Deduction

October 17, 2005

An excellent op-ed from this Sunday's Seattle Times unleashes a terrific and well-deserved salvo against the home mortgage interest deduction. From the piece:

The mortgage-interest deduction is bad economic policy. It encourages consumption, rather than saving. People take out big mortgages to free up spending money. (A little devil tells them not to worry about all the borrowing because the interest on the loan can be tax-deductible.) An unhealthy economic incentive, the deduction is also expensive. It cost the Treasury $63 billion last year in needed revenues. The entire budget of the U.S. Department of Housing and Urban Development was $35 billion.

The deduction is bad social policy. It discriminates against renters, and even homeowners of moderate means.

"The people who have the biggest homes, who make the most money are the greatest beneficiaries of this tax subsidy," says Nicolas Retsinas, director of the Joint Center for Housing Studies at Harvard University. "If you rent, you don't get the deduction. Even if you own a home and have a modest income, you're likely to take a standard deduction, which means you don't get it."

The mortgage-interest deduction is a boulder in the stream of tax reform. A lot of people say they want a "flat tax" — a single rate for all incomes, with no deductions, exemptions or loopholes allowed. A flat tax could cure the annual migraine of filling out IRS forms. But there can be no honest flat tax that makes an exception for a break that benefits the well-to-do...

Reagan was right on this one. And so is Bush's tax advisory commission. Is there a brave political soul out there looking for a good policy?

Agreed on all counts—including the author's pessimism that lawmakers will substantially reform the home mortgage interest deduction given pressure from realtors and home builders to preserve it. Read the full piece here.

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