The Mortgage Interest Deduction Scam

Arnold Kling adds some perspective to the debate over the mortgage interest deduction.

1) If I buy a property and rent it out, then my income is equal to the rent that I get, minus expenses, including interest payments on a mortgage. Thus, I get to deduct mortgage interest.

(2) If homeowners could not deduct mortgage interest, then landlords would have an advantage. That is, the landlord could deduct mortgage interest, but the homeowner could not.

(3) As a homeowner, I do not count as income the “rent” that I earn on the house. This gives me an advantage over a landlord.

(4) Also, I do not count as income a capital gain from selling the house. This is another advantage over a landlord.

He says the main distortions arise from (3) and (4), and removing them would improve the argument for maintaining the deduction. He also, realistically, notes that the popularity of the deduction means it’s here to stay.

One way to make the deduction less popular is to force the real estate industry to stop selling the deduction as an advantage for one and all. If you search for mortgage interest deduction calculators you get sites like this and this. Egregiously they calculate the amount of money you save via the deduction, but fail to compare the benefits of the deduction to the benefit of the standard deduction. Most first time home buyers, particularly in this era of low interest rates, will not itemize and take the deduction since it will inevitably result in a smaller deduction than that allowed by the standard deduction.

The depth of disclosure inherent in the home buying experience far exceeds the disclosure for any other financial transaction. It seems more than odd that a sales tool – the deductability advantage – would not be subject to disclosure as well. It’s a simple calculation and surprising that this sort of hype has been allowed to continue unfettered while so much else is required. It would seem an area ripe for regulation via the Consumer Financial Protection Bureau.

Exposing the regressive nature of the mortgage interest deduction would go a long way towards changing sentiment as voters realized that it’s not a universal benefit of homeownership. In this day and age of sticking it to the rich, it also would play politically.

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