Who Cares About Mortgage Interest Deductibility?

Abstract

We use the U.S. Survey of Consumer Finances to measure the change in federal tax liability that would result should mortgage interest no longer be deductible from taxable income. We argue that the elimination of this housing tax provision would lead households to reshuffle their balance sheet, thereby lowering the amount of interest income taxes collected. We find that the cost of this tax provision is between 36 and 66 percent of the estimates produced by the U.S. Office of Management and Budget, depending on the types of assets one assumes would be used to lower mortgage debt following the removal of the provision. Furthermore, since mostly rich households would be in a position to reshuffle their balance sheet following such a change in tax policy, the distributional effect of this program are much smaller than conventionally believed.

Why has home ownership fallen among the young?

“…Gervais (2002) shows that even the elimination of mortgage interest deductibility would have only modest consequences for home ownership. Similarly, Gervais and Pandey (2008) argue that relatively high income families do not benefit from mortgage interest deductibility nearly as much as conventionally believed when the family's budget constraint is taken into account. There were other changes to the tax code in 1986 which increased the incentive to build multi-family rental units.…”

The Mortgage Interest Deduction and its Impact on Homeownership Decisions

“…However, high income households also tend to be higher wealth households and therefore they are likely to use equity financing to purchase their homes in the absence of the mortgage interest deduction (Gervais and Pandey, 2008), thus further suggesting that the MID may have little impact on homeownership attainment.…”

Housing Policies in the United Kingdom, Switzerland, and the United States: Lessons Learned

“…As a consequence, the MID does not create new homeowners but, rather, increases the housing consumption of well-off households. According to Gervais and Manish (2008), wealthy households may use equity financing if the MID is not available, further providing support for the hypothesis that the homeownership decision of these households is not influenced by the deduction. Bourassa and Ming (2008) provided some evidence that the MID is not only ineffective, it lowers the homeownership rate among young households due to price capitalization effects.…”