Who Really Benefits From Mortgage Interest Deductions?

Lisa Prevost writing for The New York Times:

Real estate and building industry groups have loudly condemned proposals by both presidential campaigns to shrink the mortgage interest deduction. Central to their arguments is the long-hallowed deduction’s value to the middle class. But a closer look at who benefits suggests that this perception, though prevalent, is not accurate. 

To begin with, most taxpayers do not benefit from the deduction at all. This is because they do not itemize deductions on their federal income tax returns. According to Joseph Rosenberg, a research associate at the Urban-Brookings Tax Policy Center, only about 30 percent of taxpayers itemize, rather than take the standard deduction. And the majority of these itemizers are upper-middle and upper-income households...

The other factor is that the value of the subsidy increases along with your tax bracket.

Read the whole thing.

The mortgage deduction is a policy that distorts the actual value of a home, making it look more valuable than it economically is.  This leads to an over-consumption of housing an over-provision of single family homes in the economy.  The poor are not only those who are least able to afford homes, but also are in the lowest tax bracket, receiving very little benefit from the mortgage deduction.  As Prevost writes in her article, the tax benefits are mostly enjoyed by the wealthy.

Harvard's Ed Glaeser notes that the mortgage deduction contributes to suburban sprawl by incentivizing people to own when, but for price distortions due to tax policies, they might be better off renting a smaller home in or nearer to a city.  This has huge ramifications on losses in productivity and well-being from time wasted commuting, environmental impact from lowered access to public transportation and additional miles driven, and lessened economies of scale on services in the suburbs relative to cities.  The mortgage deduction also incentivizes people to purchase larger homes than they otherwise would, again leading to a waste of resources in building, heating, cooling, and maintaining overly-large houses.  As Glaeser points out in his book, if other countries like China and India suburbanize the way the United States has, it could lead to large global increases in carbon emissions and the demand for oil.

I have recently been teaching my microeconomics class about positive externalities and negative externalities.  If suburban living has as many negative externalities as Glaeser believes, maybe home ownership should be taxed rather than subsidized?  At a minimum, the mortgage tax deduction is a policy that seems to have little justification from either the perspective of economics or equality.

(HT TaxProf Blog)