The Mortgage Interest Tax Deduction Should Be Repealed

I will no doubt be crucified for this one.  Americans love their tax deductions and there’s one deduction they like more than all the rest combined:  the mortgage interest tax deduction.  People love it because they think it saves them money, but in reality it does no such thing.  Here’s why.

Why The Mortgage Interest Tax Deduction Is A Bad Idea

The mortgage tax deduction was ostensibly enacted by congress in order to make home-ownership more affordable for the average American.  Perhaps the deduction did serve that purpose originally.  The day the mortgage interest tax deduction went into affect, the purchasing power of those in the market for a new home increased significantly.  Let’s give congress the benefit of the doubt and assume sellers didn’t immediately catch on.   Thus, the first round of buyers got a great deal on a new home courtesy of good ol’ Uncle Sam.

For the average modern American family, the deduction might be worth perhaps $100 per month.  Sounds great, right?  Not so fast.  The real estate market has become increasingly sophisticated over the past few decades as the home-ownership rate has skyrocketed.  While the mortgage interest deduction might once have actually improved home affordability, those days are certainly long gone.  Today, the value of the mortgage interest tax deduction is priced in to the cost of real estate.  That is, the market has automatically adjusted itself over the years (as markets are wont to do) to cancel out the benefits of the popular deduction.  Since buyers tend to base what they think they can afford on monthly cash flow instead of total cost, the mortgage deduction tends to increase the amount buyers are willing to bid on a given property compared to what they would be willing to pay in the absence of a deduction.  In essence, the deduction actually increases the average price of residential real estate by the average value of the deduction, rendering it useless.

“So the mortgage interest deduction is useless,” you say.  “But at least it doesn’t hurt anything, right?”  Ah, but it does!  Millions of dollars per year are wasted on tax services to account in large part for these deductions, money that could be invested far more productively elsewhere.  It is impossible to estimate, of course, but I feel confident the economy as a whole has suffered indirectly as a result of this deduction.  Every dime spent adhering to the tax code is a dime that could have been invested in new jobs, better infrastructure, better education, and better health care.  Too bad Americans will never give it up.