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Monday, November 27, 2006

Analysis of the President's Tax Reform Panel Recommendation to Convert the Mortgage Interest Deduction to a Tax Credit

Ssrn_183 John E. Anderson (University of Nebraska, Department of Economics), Andrew Hanson (Syracuse University, Department of Economics) & Jeffery P. Clemens (Harvard University, Department of Economics) have posted Tax Reform and Incentives to Encourage Owner-Occupied Housing: Analysis of the President's Tax Reform Panel Recommendation to Convert the Mortgage Interest Deduction to a Tax Credit on SSRN.  Here is the abstract:

Public policy designed to encourage home ownership has operated primarily through the federal income tax system in the United States. With multiple incentives for home-ownership, the income tax system is the main tool by which the federal government encourages families to become home-owners and accumulate wealth in the form of real estate. Recent policy debate over reform of the tax system has questioned whether a mainstay of this system, the mortgage interest deduction (MID), is the best way to accomplish the stated objective. Last year the President's Advisory Panel on Federal Tax Reform recommended converting the MID into a 15% tax credit subject to regional caps related to median house prices, touching off a vigorous public debate on the importance of the MID. The purpose of this paper is to examine economic implications of that recommendation. We model how switching from the MID to a credit would affect housing finance choices between debt and equity and show how these changes would have changed the tax benefits for various households. Furthermore, we simulate the number of mortgage originations in 2004 (the most recent year which data is available) that would have been subject to the caps in the Panel's recommendation, and we identify the specific urban housing markets that would have been most severely affected. Finally, we conclude with policy discussion of the proposed credit alternative.

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Comments

This is a terrific article. I remember enough from my days as an economics major to even understand most of it.

Having hung around both public finance economists and tax lawyers, it's unfortunate that there is not more fruitful conversation between the two groups. When I was a student of public finance, I could not understand *why* in the world the 'efficient' proposals by economists would not be adopted.

Now, better versed in the tax law and the ways of Washington, I can't see how Congress can pay heed to 'efficient' proposals, when *obviously* (!!!) politics comes first.

This is nonetheless a great article, but I think scholarship on matters like the mortgage interest deduction, etc. would benefit from multiple perspectives; tax lawyers need a does of economic reality, and economists need a dose of political reality. Otherwise, I think good scholarship will be too easily dismissed.

Posted by: andy | Nov 27, 2006 2:17:51 AM