Realtors and home builders strongly defend the mortgage interest deduction as a way of increasing homeownership, which is supposed to be a good thing. But does it really work that well?
Edward Glaeser doesn’t think so. While he agrees that there are social benefits to increasing homeownership, he notes that the mortgage-interest deduction mainly benefits the wealthy, who are almost always homeowners anyway. He also finds that, while the subsidy has changed significantly over the years, those changes have not been reflected by changes in homeownership.
Charging taxes on interest is double taxation because the people who earn the interest also have to pay taxes on it. So, as Wikipedia notes, when Congress created the income tax in 1913, it allowed people to deduct the interest from all personal loans, not just mortgages. But in 1986, Congress (no longer worried about double taxation) repealed that deduction for all loans other than home loans. The stated reason for leaving that deduction was to promote homeownership.
The data clearly show that mortgage-interest deductions are claimed mainly by the wealthy, or at least the middle- and upper-middle classes. For one thing, you have to earn enough income in the first place for the deduction to mean anything. Still, at the margin, there must be some people whose incomes aren’t quite high enough for them to buy a home without the deduction but are high enough with the deduction. So, if you believe in increasing homeownership, is it worth keeping?
It turns out the answer is more complicated than that. A recent analysis by economists from the London School of Economics and Kansas State University finds that the effects of the deduction on homeownership depends on where you live. What makes the difference is the amount of land-use regulation.
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The head of the FDIC, Shiela Bair, wants to end the mortgage-interest deduction because, she fears, it and other housing subsidies simply “push up the price of houses, undermining so-called affordable housing programs.” But it turns out that’s only true in places that heavily regulate land use.
Americans collectively “save” about $100 billion a year on their taxes by deducting mortgage interest. Some people see this as “costing taxpayers” [meaning the government] $100 billion a year, but I suspect that any changes in the deduction would be revenue-neutral (as were changes in the deductibility of other interest in 1986). Some have proposed to eliminate the deduction for homes over 3,000 square feet in order to “punish” people for wasting energy with large homes.
Others, concerned about the fact that the deduction benefits mainly the wealthy, have suggested limiting the deduction only to the first $500,000 of the value of first homes. If the goal is to promote homeownership of lower income families, a more effective policy would be to replace the mortgage-interest deduction with a revenue-neutral tax credit available to homeowners of all incomes.
But why should the government promote homeownership? Advocates of the tax-credit policy say it would increase homeownership by about 3 percent, but that means the other 65 percent of households who would own their homes either way get a windfall benefit. Granted that there are social benefits of homeownership, they probably aren’t large enough to justify giving tax credits to everyone who would own a home even without the tax credits.
I suggest returning to the pre-1986 policy of allowing deductions for all interest. Ending double taxation of interest makes a lot more sense than giving wealthy people tax breaks for doing something they would do anyway. Those who want to promote homeownership should focus policies on the margin–that is, on those people who could not own a home without a little help.
A-men, bruddah. We can eliminate the HMID no problem. Next up: farm subsidies, then Big Oil subsidies.
DS
The drop in housing prices is a major problem for those who own houses already. Most recent buyers have purchased at the upper end of what they can afford, and they have factored into their determination of affordability the tax benefits of the mortgage interest deduction. The loss of this deduction will dramatically change the equation for these people, and the risk of more owners finding themselves under water will rise. Reducing housing affordabiity is not how I would think we would go about trying to turn around our economy. Nor is limiting the loss to buyers of upper end houses going to jump start the construction industry. While the administration says that its primary focus is on jobs and jumpstarting the economy, it is difficult to see how that will occur without a big boost from the housing industry.
SFD is overbuilt in many areas. There is a 9+ months’ supply now. Building more houses now with un/deremployment at ~15% isn’t a winning strategy. But builders know this already.
DS
To Dan and the anti-planner I would add the elimination of road subsidies. To thislandismyland, I would point out that the concept of promoting housing affordability is a chimera. In the last decade and a half the two largest affordability programs; government induced easy credit and collateralized mortgage obligations, only served to gin up the price of housing. Actual homeownership rates rose only a few percentage points. Very few homeowners entered the market who would not otherwise have in the absence of the aforementioned programs.
Though, O’Toole at The Thoreau Institute is just a smokescreen sockpuppet for the Cato Institute, founded and funded by Koch family Oil interests.
Metrosucks, I know you’re being a smarty-pants and parodying Dan, but I was thinking yesterday about this tact that Dan uses so frequently (e.g. blaming the Koch Brothers for all the world’s evil, blaming pro-Antiplanner commenters here for being sockpuppets in the Koch conspiratorial scheme of things, etc.) and I have a question.
How is the Koch Brothers-Bad Evil People-Illuminati-Cato Mercenaries-Shadowy-Cabal conspiracy theory that lefties love any different than other horrible conspiracy theories out there e.g. trutherism, birtherism, Jenny McCarthy-style anti-vax hysteria, anti-Smart Meter hysteria in Northern California, Alex Jones’ idea that we’re all chesspieces on the globalist gameboard, etc?
I think the answer is this: it’s no different. I’ll go out on a limb and suggest that conspiracy theories are almost always garbage. They seem to be embraced by people who refuse to analyze a complex situation from multiple points of inquiry – intellectual laziness at its “finest” hour! Why critically analyze something when you can package it as a neat, clean conspiracy theory all tied up with a commemorative Cato-Is-Evil bow?
It’s “clownish” to use Dan’s own language.
Metrosucks, I know you’re being a smarty-pants and parodying Dan, but I was thinking yesterday about this tact that Dan uses so frequently (e.g. blaming the Koch Brothers for all the world’s evil, blaming pro-Antiplanner commenters here for being sockpuppets in the Koch conspiratorial scheme of things, etc. and I have a question.
How is the Koch Brothers-Bad Evil People-Illuminati-Cato Mercenaries-Shadowy-Cabal conspiracy theory that lefties love any different than other horrible conspiracy theories out there e.g. trutherism, birtherism, Jenny McCarthy-style anti-vax hysteria, anti-Smart Meter hysteria in Northern California, Alex Jones’ idea that we’re all chesspieces on the globalist gameboard, etc?
I think the answer is this: it’s no different. I’ll go out on a limb and suggest that conspiracy theories are almost always garbage. They seem to be embraced by people who refuse to analyze a complex situation from multiple points of inquiry – intellectual laziness at its “finest” hour! Why critically analyze something when you can package it as a neat, clean conspiracy theory all tied up with a commemorative Cato-Is-Evil bow?
It’s “clownish” to use Dan’s own language.
Well, actually, Iced, I noticed that O’Toole coddles Dan and protects him from criticism, including deleting posts that are overly harsh toward the planners, but Dan’s side can say whatever the hell they want. So I figure I will give O’Toole a taste of his own medicine. He’s been acting like a hypocrite ever since the whole jumping to Dan’s defense a couple weeks ago.
METROSUCKS,
Having talked with Randal a couple times via e-mail, I get the sense that he is a very fair-minded and gracious guy and willing to give even his most vile critics fair treatment. The fact that Randal is willing to treat Dan just as kindly and fairly as he treats the rest of us is a testament to the Antiplanner’s overall character.
The fact that Randal has accommodated Dan despite the fact that Dan has consistently called Randal a crook, a liar (or worse) should give all of us a pretty good idea which of the two men has a good grasp of ethics, and which one is a repugnant as#-loaf.
BTW, please disregard the double-posting and italics disaster of my earlier comment. Just an HTML posting screw-up on my part. Argghh!
Borscht, O’Toole gets paid to write stuff based on a false premise.
So how the fuck is he fair-minded?
Now here’s a real world example of how being fair minded actually is.
Portland, OR + Streetcars = Reasonable
Blitzen, OR + Streetcars = Unreasonable