Wednesday, August 7, 2013
When people talk about “sacred cows” in the tax code, the deduction for mortgage interest is usually at the top of the list. But it is just one of many tax expenditures benefiting homeowners. Other important ones include the deduction for property taxes and low taxes on the gains from sales of primary residences.
Contrary to popular belief, the mortgage interest deduction wasn’t adopted to encourage home ownership. The original income tax enacted in 1913 allowed a deduction for all interest on the theory that it was largely business-oriented. According to Dennis Ventry of the University of California, Davis, School of Law, only a third of homeowners carried a mortgage in 1910. ...
It is likely that if mortgage interest had never been deductible the home ownership rate would be similar to what it is today. Indeed, it might even be higher, according to research by the economists Matthew Chambers, Carlos Garriga and Donald E. Schlagenhauf. They contend that without deductibility tax rates could have been lower, which would have raised after-tax incomes, making it easier to afford a home.
There is further evidence from foreign countries. According to a recent paper by the economists Steven C. Bourassa, Donald R. Haurin, Patric H. Henderschott and Martin Hoesli, there is little evidence that mortgage interest deductibility has any impact on home ownership rates one way or another. As the table from their paper shows, many countries without deductibility have higher home ownership rates than we do, and some with deductibility have lower rates.
The principal constraint on any reform is that the mortgage interest deduction is very popular, according to every poll on the subject. ... The main argument for reforming the mortgage interest deduction is simple math – it is the second largest tax expenditure, reducing federal revenues by more than $100 billion. It will be harder to reduce tax rates if the deduction is declared off limits.