The Shame of the Mortgage-Interest Deduction

It’s not just a failure of housing policy. It's a symbol of everything that’s wrong with the American tax code.

A home for sale in Portland, Oregon
Steve Dipaola / Reuters

It might be one of the most important policies in the U.S. economy, but the mortgage-interest deduction sounds esoteric to most people. Perhaps that’s because, for most people, it’s completely irrelevant.

Although about two-thirds of American households own a home, only one-quarter of them claim the deduction, which sometimes gets abbreviated to MID. As Matthew Desmond, a sociologist at Harvard University, explains in a magisterial essay on the MID in the New York Times Magazine, this little fact has played an outsized role in the United States’ yawning wealth inequality.

Federal housing policy transfers lots of money to rich homeowners, a bit less to middle-class homeowners, and practically nothing to poor renters. Half of all poor American families who rent spend more than 50 percent of their income on housing costs. In May, rental income as a share of GDP hit an all-time high. Meanwhile, in 2015, the federal government spent $71 billion on the MID, and households earning more than $100,000 receive almost 90 percent of the benefits. Since the value of the deduction rises as the cost of one’s mortgage increases, the policy essentially pays upper-middle-class and rich households to buy larger and more expensive homes. At the same time, because national housing policy’s benefits don’t accumulate as much to renters, it makes it harder for poor renters to join the class of homeowners.

But the MID isn’t just a symbol of housing policy falling prey to plutocracy. It’s a broader moral indictment of the tax code.

The federal government is quite explicit about using taxes to encourage the formation of wealth. There are tax breaks for investment (like capital gains and dividends), for savings (like Roth IRAs and health-savings accounts), and for homeownership. It’s easy to make an argument for each specific policy. Who wants to punish investment? Or raid retirement accounts? Or discourage saving for health care and housing?

But this national wealth-creation policy has several negative side effects. Since tax benefits are most useful for people with taxable income, U.S. wealth-creation policy is predominantly for people who already have wealth. These high-income households don’t consider their tax benefits to be a form of government policy at all. For example, 60 percent of people who claim the MID say they have never used any government program, ever. As a result, rich households can be skeptical of public-housing policies while benefiting from a $71 billion annual tax benefit which is, functionally, a public-housing policy for the rich. As Desmond writes, “a 15-story public housing tower and a mortgaged suburban home are both government-subsidized, but only one looks (and feels) that way.” In short, an asset-building, wealth-creation, or welfare policy that’s run through the tax code can hurt the overall push for more direct forms of welfare—like simply giving money to the poor.

President Donald Trump’s tax-reform plan—or page—would be radical and transformational. But it wouldn’t radically transform the MID. Instead, it would double the standard deduction, making the MID useless for all but the wealthiest households, exposing it as merely "a generous public-housing program for the rich,” as Desmond wrote.

Many of the solutions to make it easier for low-income people to rent are generally considered the providence of local government—like rental assistance, zoning laws, construction permits, and rent control—but the federal government could play a role, too. Rather than scrap the MID entirely, which might be politically impossible, the federal government could cap it at around $500,000 (rather than the current level of $1 million) and use the savings on housing vouchers and support for low-income homebuyers.

But more generally, people need money to buy houses. The United States still lags almost every advanced economy in the amount of money transferred from the rich to the poor. One major reason is that the tax code has become a vehicle for incentivizing wealth-creation among households who already have the most wealth, even as the government has soured on policies that spend money directly on the poor. It’s hard to find a better exemplar of this sorry fact than the juxtaposition of America’s affordable housing crisis and the untouchable sanctity of the mortgage-interest deduction.