Democrats and Republicans have touted the tax break, and billed any moves to eliminate it as an attack on the middle class. Ronald Reagan promised to protect the deduction on mortgage interest as his Treasury Department began proposals for what would become the Tax Reform Act. In 2012, Vice President Joe Biden accused Republicans Mitt Romney and Paul Ryan of plotting to eliminate the mortgage-deduction break. "The only way you can find $5 trillion in loopholes is cut the mortgage deduction for middle-class people," Biden said during the vice presidential debate.
One of the top priorities of the National Association of Home Builders, as stated on the group's website, is to protect the deduction, on the rationale that repealing it would raise taxes on homeowners and leave them with mortgages worth more than their property.
But in practice, the home-mortgage deduction tends to benefit the wealthy instead of the middle class, according to the conservative R Street Institute. In a 2014 study, the group found that it largely benefits suburban-area families in metropolitan areas, and families making at least $100,000 in all metro areas surveyed, and leads to the creation of McMansion-style homes.
"Generally what goes on is because we have a progressive tax system, the deduction is worth more to a high-income than a low-income person," said William Gale, codirector of the Tax Policy Center and former senior economic adviser to President George H.W. Bush.
It's not just conservatives who are critical of the deduction. A 2011 study from the left-leaning Center for American Progress found that families with incomes between $40,000 and $75,000 received an average of $523 from the deduction for a year, while families making more than $250,000 received $5,459 from the deduction on average.
Currently, the limit to the amount that can be deducted is $1 million. As part of their deficit-reduction plan, former Sen. Alan Simpson and former Clinton White House Chief of Staff Erskine Bowles capped the deduction at $500,000, instead giving a 12 percent nonrefundable tax credit to all taxpayers, which Simpson said would benefit "the little guy."
Tax credits for low-income housing
The Low-Income Housing Tax Credit is among the federal government's main tools for pushing private investors to put money into developing housing that people with little income can afford. The credit uses an indirect subsidy to finance housing and encourages allowing investors to claim credit on income-tax returns. The equity raised by the credits can be used for the construction or rehabilitation of housing. A study from the Office of the Comptroller Currency noted that it had helped create 2.4 million units for affordable rental housing.
In practice, however, there are indications that the tax break is more effective at rewarding developers than promoting low-income housing development. Elaine Maag, a senior research associate at the Tax Policy Center, said that every $1,000 spent on the low-income housing tax credit generates only around $600 worth of low-income housing. This is in line with a study from the Center placing that number around $590 for every $1,000 spent, but Maag says there is some evidence it is improving.