About a year and a half ago, my mother bought a house. At the time of the purchase she lived alone and had no expectation that she would ever live with more than one additional person. And yet she purchased a 5-bedroom home with a view of the Delaware River. The house is, to put it simply, too large for a single woman whose children have grown and left. But despite the economic irrationality of the purchase, all taxpayers have, and sadly will probably continue to, subsidize this indulgence. Thank the home mortgage interest deduction. MORE
This deduction continues to grow in popularity as evidence builds that it is deeply flawed. Yes, the United States has impressive rates of homeownership, but the cost of the broad-based deduction is high. As Lawrence H. White puts it in a recent study by the Cato Institute: “this broad-based encouragement means that the United States has invested in an excessively and inefficiently large housing stock and that its stock of other physical (and perhaps human) capital is too small. Edwin Mills has estimated that the U.S. housing stock is 30 percent larger than would be the case if these encouragements were absent and the U.S. income is about 10 percent lower than it could otherwise be.” That is an enormous price to pay for a benefit that does not accrue to those lower income Americans who logic dictates could most use assistance in becoming homeowners. As Daniel Gross notes in a piece yesterday in Slate: “Taxpayers who don't itemize deductions-generally people in the lower income brackets-don't receive any benefit from the home-mortgage deduction. And the more you borrow, and the higher your tax bracket, the more valuable the deduction becomes.” I consider myself a staunch supporter of capitalism, and I begrudge the wealthy nothing, but this seems like bad policy to me.
Why have we accepted a state of affairs in which the Americans are incentivized to purchase more house than they need? Why allow deductions for home equity loans and interest only loans when both run counter to the supposed goal of building equity? If we want to create an ownership society, we should also look to ensure that citizens are not induced to make ownership choices that lessen their overall wealth.
Replies: 2 Comments
Posted by:
Bill Fellers
On Wednesday, April 20th
Excellent commentary! This is basically the argument I've been making for years to my family and friends, many of which are involved in the real estate trade in one form or another. You should hear the logical contortions they go through to justify their (what I consider immoral) cash cow.
Posted by:
Nathan_Smith@ksg03.harvard.edu">Nathan Smith
On Monday, April 18th
Bravo!
