I’d like to get some thoughts. Hopefully, this won’t devolve into a red vs blue match.
How do folks feel about the mortgage interest deduction? It’s one of the largest deductions in the tax code. To the extent a taxpayer pays mortgage interest, she can deduct the interest portion in determining her taxable income. Presumably, this encourages home ownership. So the benefit of home ownership exceeds the “cost” of the foregone tax revenues.
But nothing in life is free.
Let’s say you have a country with 10 families. 5 own a home with a mortgage and 5 rent a home. The government needs to raise $10,000 per year to pay for services. Let’s also assume each family has the exact same pretax income and number of kiddos. Let’s also assume that each of the 10 houses are identical in value. Also assume that each of the 10 families receives the same government services with respect to roads, schools, parks, police, etc.
Option A: Mortgage interest deduction. Each family with a mortgage pays tax of $900 and each family that rents pays tax of $1,100. Total tax revenue raised is $10,000.
Option B: No mortgage interest deduction. Each family with a mortgage pays tax of $1,000 and each family that rents pays tax of $1,000. Total tax revenue raised is $10,000.
Currently, our income tax system uses option A. Any politician who proposes to end the mortgage interest deduction? Just imagine the TV ads from the opponent. Yet presented with the simple scenario above, can anyone argue that Option A is more “fair” than option B? I’d like to get feedback.