Allowing Americans to “keep some $80 billion of their hard-earned income” is a terrific idea. But the home-mortgage tax deduction is not an effective way of accomplishing this goal, and damages the broader economy.
The government allows taxpayers to deduct mortgage-interest costs from their federal taxes. The program doesn’t really support home ownership, then, but home indebtorship.
The last thing the country needs is more household debt. Yet real-estate agents and mortgage lenders routinely advise potential home buyers that it’s smart to borrow heavily because “you’ll get a nice tax refund.” The tax code even encourages Americans to take equity out of their homes. In this sense, mortgage-interest favoritism actively encourages the very opposite of home “ownership.”
Further, government subsidy of home borrowing doesn’t so much let Americans keep their own hard-earned money as it does transfer and obscure costs. The mortgage-interest deduction enables people to borrow more. This easy money pushes up the cost of housing. Artificially high housing costs, in turn, penalize the people who want to limit their own indebtedness by saving up and making a big down payment on a house.
People must pay taxes on money that they save up in advance to buy a house — but get a tax reward on their house borrowings. Amazing.
Home-indebtorship subsidies hurt renters and rental neighborhoods, too. The minute anyone enters the middle class, he has every rational reason, under an irrational government tax regime, to take his family out of a rental neighborhood. So rental neighborhoods remain poor and transient.
Strong government favoritism of one type of investment — in this case, borrower-occupied houses — also hurts Americans’ ability to invest nimbly and wisely. The government certainly won’t let a hard-working American borrow subsidized money cheaply to invest, say, in a diversified stock and bond portfolio, but he gets those privileges if he chooses to “invest” in his own house. This government distortion — exacerbated by unfair tax treatment of the profits from selling a house vs. the profits from selling a stock – results in Americans having all of their investment eggs in one basket.
Government housing-borrowing policy harms economic growth. It encourages Americans and their lenders to throw money into a mostly unproductive asset at the expense of investing in profit-making companies and other productive ventures, which harms economic growth.
Lastly, the mortgage-interest deduction is bad for the environment. It encourages people to buy more house on more acreage than they need (even two houses!), pushing up heating and commuting costs.
Readers can find more about the government’s “obssessive housing disorder” (diagnosed by my colleague Steve Malanga) here.
— Nicole Gelinas is a contributing editor to the Manhattan Institute’s City Journal.