The Case Against the Mortgage Interest Deduction

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This set of slides gives the case against the mortgage interest deduction. It argues that the deduction most benefits wealthy taxpayers, raises home prices and encourages speculation, and increases the budget deficit while doing little or nothing to increase the rate of home ownership.

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The Case Against the Mortgage Interest Deduction

  1. More Slides from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/ The Case Against the Mortgage Interest Deduction Posted February 6, 2011 Terms of Use: These slides are made available under Creative Commons License Attribution—Share Alike 3.0 . You are free to use these slides as a resource for your economics classes together with whatever textbook you are using. If you like the slides, you may also want to take a look at my textbook, Introduction to Economics , from BVT Publishers.
  2. Everything on the Table <ul><li>The United States is struggling to recover from a deep recession and to cope with a looming budget crisis </li></ul><ul><li>All policies of the past must be put on the table—even the sacred cows </li></ul><ul><li>Even the mortgage interest deduction </li></ul>Posted Feb. 6, 2011 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com The Hindu God Krishna with a Sacred Cow Photo source: http://commons.wikimedia.org/wiki/File:Krishna.jpg
  3. Housing Policy and the Economic Crisis <ul><li>A new report from the Organization for Economic Cooperation and Development details how badly-designed housing policies played an important role in triggering the recent economic and financial crisis </li></ul><ul><li>It advocates reforms that would ensure that housing policies are designed to ensure adequate housing for citizens, support growth in long-term living standards and strengthen macroeconomic stability. </li></ul><ul><li>http://www.oecd.org/document/13/0,3746,en_21571361_44315115_46917325_1_1_1_1,00.html </li></ul>Posted Feb. 6, 2011 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com The OECD is an organization of developed, democratic countries whose mission is to promote policies that will improve the economic and social well-being of people around the world. It currently has 34 members.
  4. Price Elasticity of Housing Supply <ul><li>In some respects, US housing policy scores comparatively well. For example, a relatively liberal regime of building and land-use permits allows housing to respond more readily to price increases than elsewhere in the OECD. </li></ul>Posted Feb. 6, 2011 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com
  5. Landlord-Tenant Regulations <ul><li>In addition, the US housing market is relatively free of the pro-tenant biases that discourage investment in rental housing in many OECD countries. </li></ul>Posted Feb. 6, 2011 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com
  6. Tax Treatment of Housing Investment <ul><li>However, the US scores poorly in terms of tax treatment of housing investment </li></ul><ul><li>Ideally, tax treatment of housing should be the same as for other forms of investment </li></ul><ul><li>Pro-housing bias of taxation encourages speculative behavior, increases price volatility, and crowds out more productive forms of investment, all to the detriment of growth and macroeconomic stability </li></ul>Posted Feb. 6, 2011 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com Photo source: US Navy, http://commons.wikimedia.org/wiki/File:US_Navy_060816-N-3165S-013_This_home_under_construction_is_one_of_the_many_new_units_being_built_by_Lincoln_Family_Housing_to_provide_more_quality_homes_for_military_personnel_in_the_Mid-Atlantic_region.jpg
  7. Measuring the Tax Bias <ul><li>Tax bias can be measured by comparing market interest rates with the after-tax cost of debt financing of housing. The larger the gap, the greater the pro-housing bias </li></ul>Posted Feb. 6, 2011 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com
  8. Two Ways to Eliminate the Bias <ul><li>Tax imputed rents but not mortgage interest </li></ul><ul><li>Calculate the fair-market rental value of owner-occupied housing (the imputed rent ) </li></ul><ul><li>Tax the imputed rent as if it were ordinary income </li></ul><ul><li>Allow deduction of mortgage interest and depreciation </li></ul><ul><li>Theoretically elegant, but administratively difficult </li></ul><ul><li>Tried in England, Sweden, and Italy with limited success </li></ul>Posted Feb. 6, 2011 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com <ul><li>Tax mortgage interest but not imputed rents </li></ul><ul><li>Administratively easier than taxation of imputed rent </li></ul><ul><li>Used in Australia, Canada, Germany, and Japan </li></ul>
  9. Distributional Effects of the Mortgage Interest Deduction <ul><li>The mortgage interest deduction is also subject to criticism on grounds of its distributional effect </li></ul><ul><li>The deduction has the greatest value for high-income families that are more likely to itemize deductions, own larger homes, and are in higher tax brackets </li></ul><ul><li>The average value of the deduction to lower-income groups is very small </li></ul>Posted Feb. 6, 2011 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com
  10. Reducing the Budget Deficit <ul><li>Tax expenditures, popularly known as “loopholes,” account for more than half of the federal budget deficit </li></ul><ul><li>The mortgage interest deduction is one of the largest tax expenditures </li></ul><ul><li>Its elimination would do as much to close the budget gap as a 15% reduction in nondefense discretionary expenditures of all kinds </li></ul>Posted Feb. 6, 2011 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com For a full discussion of tax expenditures, a report from the Tax Policy Center study is available at http://www.taxpolicycenter.org/UploadedPDF/1001234_tax_expenditures.pdf
  11. The Bottom Line <ul><li>The mortgage interest deduction . . . </li></ul><ul><li>leads to speculation, price instability, and crowding-out of more productive investment </li></ul><ul><li>disproportionately benefits the wealthiest households </li></ul><ul><li>adds significantly to the budget deficit </li></ul><ul><li>The bottom line: The deduction is a sacred cow that deserves to be led to slaughter </li></ul>Posted Feb. 6, 2011 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com

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