Wednesday, November 24, 2010

Mankiw: Eliminate the mortgage interest deduction

Harvard economics professor Greg Mankiw advocates eliminating the mortgage interest tax deduction:
One major tax expenditure that the Bowles-Simpson [deficit reduction] plan would curtail or eliminate is the mortgage interest deduction. Without doubt, many homeowners and the real estate industry will object. But they won’t have the merits on their side.

This subsidy to homeownership is neither economically efficient nor particularly equitable. Economists have long pointed out that tax subsidies to housing, together with the high taxes on corporations, cause too much of the economy’s capital stock to be tied up in residential structures and too little in corporate capital. This misallocation of resources results in lower productivity and reduced real wages.

Moreover, there is nothing particularly ignoble about renting that deserves the scorn of the tax code. But let’s face it: subsidizing homeowners is the same as penalizing renters. In the end, someone has to pick up the tab.


  1. I share professor Mankiw's disdain for the mortgage interest tax deduction. However, I'm not convinced that its a subsidy to homeowers so much as its a subsidy to banks.

    I mean, isn't the deduction reflected in inflated real estate prices, which are in turn reflected in larger mortgages? So its a debt subsidy, rather than a homeowership subsidy.

  2. Well, I tend to agree with this - and therefore with Prof. Mankiw, for whom I have the utmost disdain and who I consider a class warfare (ultra-rich against the rest of us) shill/quack of the first order, so I am now forced to reconsider my opposition to this tax subsidy. Bleh. Of course, stopped clocks are right twice a day.

    Happy Thanksgiving all!

  3. Will elimination of the mortgage interest deduction force up rents? Probably. This sounds like a win-win.

    Do apartment building owners get tax write-offs that aren't available to homeowners?

  4. @anonymous: yes, the tax structure for businesses (and REITs) are quite favorable and are not the same as homeowners. I'm not sure the homeowner's interest deduction depresses rents - you'd expect that deduction to make renting more expensive than owning, but all it does is inflate home prices by subsidizing them. The thing to look at is OER (owner's equivalent rent). Seeking Alpha has an interesting bit on how this number misled the fed. The issue is this: we're so overbuilt all the way around that rents are falling a bit despite the number of people shifting into renting.

  5. Montpellier said ...."Moreover, there is nothing particularly ignoble about renting that deserves the scorn of the tax code. But let’s face it: subsidizing homeowners is the same as penalizing renters. In the end, someone has to pick up the tab."

    Excuse me, but I've never seen a renter who unhappy about the fact the his children's education is bought and paid for almost entirely by homeowners through property taxes. Funny how the "other" tax property owners must pay does not come up in any of the pundit articles I've seen. The mortgage interest deduction saves me approximately $3000 a year. I pay $6500 a year in state and local property taxes. So altogether the federal and state governments are still making money off me even WITH the mortage interest deduction.

    And Mr. Mankiw, are YOU are homeowner?

  6. @Faith: One thing to consider is that the landlord pays property tax and that shows in the cost of rent. This means the renter in your example is also paying for the education system indirectly.

    I'd agree with the first poster that this seems like a bank subsidy more than a renter's penalty. People will pay what they think is a fair price, and factor the deduction in during the decision to purchase. This makes the price inflated by whatever the deduction is, and that delta goes to the banks.

    Does the American dream of home ownership mean being perpetually in debt? Something seems screwy to me if the tax code encourages average folks to get into hock up to their eyeballs, and then also discourages paying it off.

    Hopefully any elimination of this deduction would be gradual though, since I'd bet a lot of homeowners are near the margin.