Kill the Mortgage Interest Deduction Now!
It's the worst sort of social engineering and special-interest payoff via the tax code.
Thankfully, one of the biggest scams in the American tax code is finally under attack in the House version of Republican tax reform.
It's the mortgage-interest deduction, which currently lets homeowners deduct interest paid on mortgages of up to $1 million for two houses. Ever since owning a home has been a central tenet of the American Dream since the end of World War II and the rise of suburbia, it's been a given that deducting mortgage interest from your taxes is as American as apple pie.
The House plan would limit filers to deducting interest on the first $500,000 of a mortgage on just one house, sending a blind panic through wealthy home owners, realtors, and the building trades, all of whom are terrified that a government subsidy is being yanked away from them.
But the real problem with the House bill is that it doesn't go far enough. We should scrap the mortgage-interest deduction altogether and let housing prices reflect real market values.
The mortgage-interest deduction is typically justified by claiming that it lets people—especially vaguely defined "middle-class" people—afford homes. But it also increases the price of housing by making it artificially cheap to borrow, meaning homebuyers are willing to pay more. England, Canada, and Australia don't let their taxpayers deduct their mortgage interest and they all have higher rates of homeownership than the United States.
The mortgage-interest deduction disproportionately benefits the wealthiest Americans, who soak up almost all the $70 billion a year it costs in foregone revenue each year. Reason Foundation's director of economic research, Anthony Randazzo calculates that only 20 percent of tax filers claim the mortgage-interest deduction. That group by and large are part of six-figure households in a country where the median household income is just $57,000.
Killing the mortgage-interest deduction might cause a one-time 7 percent drop in real estate prices, according to one estimate, with wealthy homeowners feeling most of the pain.
As a homeowner myself, that seems like a small price to pay to end a policy that distorts the real estate market, complicates the tax code, and benefits mostly wealthier Americans on the false promise that it makes home-owning affordable for the middle class.
The mortgage-interest deduction is just special-interest pandering wrapped in a gooey story that equates "the American Dream" with having a mortgage. The tax code should be designed to raise the revenue necessary to pay for essential services, not to nudge and prod us into spending money on something the government decides is good for us.
Produced by Todd Krainin. Written and narrated by Nick Gillespie.