Wednesday, November 24, 2010

Mankiw: Eliminate the mortgage interest deduction

Harvard economics professor Greg Mankiw advocates eliminating the mortgage interest tax deduction:
One major tax expenditure that the Bowles-Simpson [deficit reduction] plan would curtail or eliminate is the mortgage interest deduction. Without doubt, many homeowners and the real estate industry will object. But they won’t have the merits on their side.

This subsidy to homeownership is neither economically efficient nor particularly equitable. Economists have long pointed out that tax subsidies to housing, together with the high taxes on corporations, cause too much of the economy’s capital stock to be tied up in residential structures and too little in corporate capital. This misallocation of resources results in lower productivity and reduced real wages.

Moreover, there is nothing particularly ignoble about renting that deserves the scorn of the tax code. But let’s face it: subsidizing homeowners is the same as penalizing renters. In the end, someone has to pick up the tab.


  1.  Really, there is too little corporate capital right now, because there are tax breaks that enable more people to own their own homes?  Oh my yes, the corporations have certainly suffered in the last decades since the mortgage deduction was enacted.  The average American would be much better off if corporations owned most of the homes and we all had to rent from them.  Serfin' USA.

  2. The mortgage deduction wasn't "enacted" a few decades ago. It is an accident of history. Back in the late 1800's only businesses took out loans, so the government counted all debt payments as business expenses, and thus tax-deductible. In the 20th century, ordinary people started borrowing money for things like houses, cars, and consumer goods. Since these are not legitimate business expenses, Congress gradually eliminated the tax-deductibility of consumer and auto loans, but didn't touch home mortgage payments because it felt that encouraging home ownership was a good thing. (Over the past decade we have learned that too much home ownership can have a destructive side.)

    For the record, the home mortgage tax deduction doesn't really help the little guy. It primarily helps people who can afford expensive houses and who have high marginal tax rates. That is, it primarily helps the upper middle class and the rich. The home mortgage tax deduction also promotes global warming because it encourages these people to buy larger houses that have a larger carbon footprint.