In the arguments for tax reform, the home mortgage interest deduction occasionally comes up. Amazingly, the call for its phase out is a measure that many on the right and left can agree. The Mercatus Center published a recent study on the mortgage interest deduction and how it encourages debt, excessive borrowing and benefits primarily upper income households. This study follows many previous ones that have documented the ineffectiveness of the mortgage interest deduction, which was designed to encourage more home ownership. But it really doesn’t do that at all, according to an NBER study. Moreover, other researchers have attributed it to a host of other effects:
- It encourages urban sprawl, says a University of Oregon study.
- It weakens the rental market, according to a Harvard University/NBER study.
- It contributed to the housing collapse, says a study from U.C. Davis.
Perhaps it’s time for a simple tax credit, as Mercatus authors Fichtner and Feldman point out. A flat credit amount would benefit lower- and middle-income homeowners without encouraging any income levels to overspend on housing. Or simply have no credit or deduction at all in exchange for a flatter income tax with a larger personal exemption.