Thursday, April 26, 2018
Business

Mortgage interest deduction doesn't aid buying

There is surprisingly little hard evidence that the mortgage interest deduction has encouraged home ownership. Harvard economists Edward L. Glaeser and Jesse M. Shapiro have found that it has only a trivial effect.

A major reason is that the deduction has long been capitalized into the prices of homes. That is, home prices are higher than they would be without the deduction. Thus to the extent that the deduction encourages home ownership, it is exactly offset by the extent to which high prices discourage homeownership.

It is likely that if mortgage interest had never been deductible, the homeownership 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 homeownership rates one way or another. As the table from their paper shows, many countries without deductibility have higher homeownership rates than we do, and some with deductibility have lower rates.

Reformers have asserted that there are negative social and economic effects to the mortgage interest deduction. For example, it may encourage people to buy pricier homes even if it doesn't affect the rate of ownership. To the extent that the deduction encouraged greater indebtedness, it may have contributed to the recent financial crisis.

As we know, a crucial problem has been that many homeowners found themselves "under water" as the value of their homes fell below the balance of their mortgages. A key contributor to excessive housing debt is the deductibility of home equity loans that can be used for personal consumption.

Economists also assert that mortgage interest deductibility may have encouraged Americans to overinvest in housing at the expense of investments in stocks and bonds that would have led to more investment by businesses in plants, equipment, research and development and so on that would have raised productivity and wages. They also suggest that excessive home ownership has made workers less mobile when the housing market is weak, unable to move to where jobs are more plentiful because they can't sell their house for enough to cover their mortgage.

Other nations have taken steps to limit or end mortgage interest deductibility. Finland adopted a reform in 1993 that limited the rate at which taxpayers could deduct mortgage interest. In Britain, deductibility was eliminated in 2000.

The principal constraint on reform is that the mortgage interest deduction is popular, according to polls. Typical are a CBS News poll in December that found 62 percent of respondents opposed elimination of the mortgage interest deduction and a New York Times/CBS News poll in June 2011, which asked people how important the deduction is. An overwhelming 93 percent of people said it was (63 percent said "very" and 30 percent said "somewhat"). Conversely, an October poll by the Pew Research Center for the People and the Press found that 47 percent of people would support limiting the mortgage interest deduction with 44 percent opposed.

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.

Bruce Bartlett held senior policy roles in the Reagan and George H.W. Bush administrations and served on the staffs of Representatives Jack Kemp and Ron Paul.

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