Why the Mortgage Interest Deduction Is Terrible
There are few tax breaks more beloved than the mortgage interest deduction. It's the IRS's way of paying you to buy a house -- by letting you deduct your mortgage interest payments from your taxable income. There are also few tax breaks more wasteful than the mortgage interest deduction.
The chart below, numbers courtesy of the Tax Policy Center, puts the mortgage-interest deduction into nice pictorial perspective. It shows what percent of the total dollar value of the deduction goes to different income groups. Although it's debatable how many "different" groups really benefit. A whopping 75 percent of this 12-figure deduction goes to the top 20 percent of earners.
(Note: I calculated which income groups fit into which percentile with this handy calculator from Phil Izzo of the Wall Street Journal. In dollar figures, the bottom 56 percent make $50,000 and less; the 57-80 percent make between $50,000-$100,000; the 81-94 percent make $100,000-$200,000; the 95-98 percent make $200,000-$500,000; and the 1 percent make $500,000 and up.)
This is a great deal if you're at least upper middle class. For everyone else, not so much. It isn't even a deal. The bottom half of households get less than 5 percent of the money. The top 1 percent alone take home more than that.
It's no secret the mortgage-interest deduction is regressive. Richer taxpayers have 1) houses, 2) bigger houses, and 3) get bigger deductions because their tax brackets are bigger. But the bad policy doesn't stop with subsidies for those who least need them. There's also the small matter of incentivizing leverage. In other words, households that take on more debt get more of a tax break. That's a head-scratcher in our post-bubble world.
None of this has been a secret for decades. The mortgage interest deduction was rotten policy in the 1980s and it's rotten policy today. Back then Michael Kinsley made the case against this taxpayer sacred cow -- along with his classic definition of a gaffe -- when President Reagan hinted at eliminating it. Spoiler alert: We didn't. Three decades on, it's depressing how much of Kinsley's analysis reads like it was written today.
We spend $100 billion every year -- that's the annual cost of the deduction -- subsidizing bigger houses for the upper middle class. This should be among the lowest of low-hanging fruit when it comes to tax reform. It would be nice to end welfare for the well-off.