America’s Costliest Tax Break

Via Neil Sinhababu, an excellent discussion of the disastrous mortgage interest tax deduction by Yahoo’s Jeanne Sahadi:


Almost half of the returns claiming the deduction were from filers with incomes over $100,000, and roughly 75% in foregone revenue that year went to them.

Meanwhile, 32% of the money went to households with incomes over $200,000, even though they accounted for only 11% of the returns claiming the deduction.

Moreover, since housing is treated more favorably tax-wise than other investments such as stocks, some economists believe the home tax breaks distort people’s investment decisions. By making the mortgage deduction less valuable, they argue, that could make the economy more efficient overall.

Senators Judd Gregg and Ron Wyden left the deduction untouched in their otherwise worthy tax reform proposal. Gregg explained: “We wanted a politically viable vehicle.”

I think this is a miscalculation on their part. Precisely the appeal of a bipartisan tax reform bill is that it can serve as the vehicle for otherwise impossible reforms like putting this deduction on a path to phase out. As written, Wyden-Gregg can’t possibly pass unless it’s supported by a bipartisan block of legislators and a cross-ideological set of wonks and elites. Becoming more ambitious by tackling the mortgage interest thing makes it more likely that you can assemble that kind of coalition. Right now I think Wyden-Gregg is in a kind of dead zone where it takes on enough special interests that it’s politically infeasible, but it’s also small-bore enough that the people who like it aren’t inclined to invest a ton of energy in it.