End the mortgage-interest deduction!

The conventional wisdom debunked.
Nov. 10 2005 12:13 PM

End the Mortgage-Interest Deduction!

Why the left should embrace the Bush tax commission's most radical proposal.

(Continued from Page 1)

Despite these large benefits, the media coverage has focused almost exclusively on a smaller number of families that would see their taxes go up under the commission's plan. The commission estimates that 85 percent to 90 percent of new mortgages in 2004 would have been unaffected by the lower mortgage limit (an even larger fraction of existing mortgages would be unaffected). That's fewer than 5 million people with mortgages large enough to be affected by the proposed cap. Some additional high-tax-bracket families would see their existing deduction curbed by the conversion to a credit.

Some more affluent families would lose not just because of their reduced tax breaks but also because it would likely drive down the value of their homes. One of the reasons there is so much scaremongering is that elites in places like New York and Washington, D.C., are disproportionately represented in this 5 million. Many of these elites would probably be surprised to learn that the median value of owner-occupied houses was only $140,000 in 2003, the most recent year for which data are available.

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Admittedly, the tax breaks curbed by the proposal are larger than the new tax breaks. This is how it will add tax revenue and perhaps help fund an AMT fix. To the degree that the savings are plowed back into other tax cuts, some of the families losing their mortgage breaks might even see their taxes go down.

Extending tax benefits to so many people would, if anything, increase homeownership, albeit modestly. Curbing tax breaks at the top would not hurt homeownership either: The more affluent would just buy slightly smaller homes and borrow less against them. The effects on house prices are ambiguous and are unlikely to be very large. It is likely to drive up the median house price as more families could enter the housing market, while it would drive down prices at the top end of the market as richer homeowners lose their subsidy.

More important, the mortgage tax credit would end a tax system that discriminates between different homeowners and would make the overall burden of taxes more progressive. In effect, it would pay for a working-family tax cut by raising taxes on some high-income families. I can see why President Bush isn't rushing to embrace his commission's housing proposal, but progressives certainly should.

Jason Furman is a senior fellow and director of the Hamilton Project at the Brookings Institution.

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