In a piece in The New York Times Magazine, Harvard University sociologist Matthew Desmond outlines how U.S. government policy toward housing has become a source of inequality rather than a force against it. Desmond highlights how the mortgage interest deduction has become a major source of inequity. The benefits of the program flow disportionately to those taxpayers near the the top of the income distribution, while those lower down the income ladder—whether homeowners or renters—don’t receive as much (if any) help.
A few figures in a blog post from the Tax Policy Center point out the upside-down nature of this tax policy. A family whose earnings put it anywhere between the 90th and 95th percentile of the income distribution gets a tax benefit that’s about 1.5 percent of its after-tax income. A family between the 40th and 60th percentiles gets around 0.3 percent. The benefit from the deduction ends up being five times larger for the higher-income family.
The inequity is even more pronounced, as Desmond points out that assistance for renters—who tend to be lower in the income distribution—is minimal compared to those who own homes.
Some policymakers or outside interest groups could perhaps make a partial defense of the mortgage interest deduction if it helped promote homeownership. But that’s not true. The deduction does little on the margin to increase the likelihood that an individual or a family will buy a house. Instead, research shows that the deduction gets people to buy a larger house once they do decide to buy. To put this effect in economics jargon, “the home mortgage interest deduction incentive works on the intensive, not the extensive, margin.” The incentive, then, is for households to increase the amount of mortgage debt they take on. The more debt they use to finance a home, the more of a tax break they will get.
As Derek Thompson points out at The Atlantic, the problems with the mortgage interest deduction are mirrored by other issues with the tax code. A number of deductions, including those for saving for retirement and for college tuition, are strongly tilted toward higher income households and are far from efficient. The mortgage interest deduction is simply one of the most egregious forms of an inequitable and inefficient policy approach.