Monday, August 31, 2009

How much revenue would scaling back the Mortgage Interest Deduction raise?

Less than static analysis would suggest. Even in the absence of the mortgage interest deduction, homeowners get a tax preference because imputed rent goes untaxed. If the MID were scaled back or eliminated, some households would sell assets with taxable returns to pay down their mortgages, thus reducing the net tax revenue arising from the policy change.

Jim Follain was the first (I think) to arrive at this insight, and Pat Hendershott and I found that people in Australia (where there is no MID) pay off their mortgages faster than Americans. The reduction in leverage is probably a good thing, and I know of no compelling argument for the mortgage interest deduction (it does almost nothing to encourage homeownership), but we should not delude ourselves into thinking that its elimination would produce a great revenue windfall.


OGT said...

I don't think that the MID is the best way to attack disparity in tax impact caused by taxing nominal income in a country with large spatial differences in cost of living and productivity.

But, those differences are real, a household making $75,000 in NYC has much less disposable income than say one making that amount in South Dakota. But, they pay the same in federal taxes.

At present the MID is one of the few policies that even implicitly recognizes this. So while I think it would be better to adjust say the standard deduction by local PPP, it seems unlikely that an explicit adjustment would be politically possible.

This paper from the U of Michigan makes the case pretty convincingly on the spatial tax disparity, and the value of local tax deductions as well as the MID.

"Starting at an average federal tax rate of 17 percent,a worker moving from a typical low-wage city to a typical high-wage city sees her average tax rate rise from 14.8 percent to 19.2 percent, paying 27 percent more in federal taxes. Although tax differences are compensated for in local prices, this represents a horizontal transfer of $269 billion (in 2008) from workers in high-wage areas to similarly skilled workers in low-wage areas.

The total tax differentials are considerable relative to typical differences in local taxes. Any local official would consider a permanent 3 percent tax on local residents without any compensating services to be a fiscal calamity. Yet, central governments are imposing this situation on cities such as Chicago, New York, and San Francisco. However, an unconditional grant of 3 percent of income in perpetuity dwarfs almost any pork-barrel project. Relative to the national average, this is what workers in cities such as Norfolk and Tucson, as well as most nonmetropolitan areas, effectively receive from the federal government."

Robert Bell said...

Hi - I occasionally pop in from EconBrowser, EconomistsView, and other blogs. Am I losing my mind or did you change your background color?

Richard K. Green said...


You are not losing your mind.

Anonymous said...

The MID should be repealed. Too much debt to GDP is bad for the economy, so debt should not be encouraged at this time. If debt to GDP ever falls too low, then the MID can be revisited.

Net exporting countries should encourage more consumption, but importing countries should ease up on the debt for awhile. Balance needs to be restored. One country cannot be the consumer of last resort for the entire world.

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