Sheila Bair‘s latest Fortune magazine column makes a case for Congress to get rid of a popular deduction from the federal income tax.
True reform will not succeed unless everything is put on the table. With the housing market still ailing, will Washington have the courage to tackle that most sacred of tax cows, the mortgage interest deduction, or MID?
We Americans love owning our houses and the taxpayer subsidies that help us pay for them. The last time Congress cleaned out the tax code in 1986, this was one of the few special breaks left untouched. But today our cash-strapped government needs to rethink all tax breaks, and the MID costs taxpayers about $100 billion per year.
The underlying rationale for the MID is to promote homeownership. Yet most independent studies find little if any correlation between homeownership rates and the MID. Indeed, Canada does not have an MID, and its homeownership rate is higher than ours. Singapore has the highest ownership rate — over 85% — with no MID. These studies also show that while an MID does not improve homeownership rates, it does impact home affordability. With taxpayers subsidizing their interest expense, homebuyers can take out bigger mortgages, which create upward pressure on home prices. Just like everything else, be it health care, college, or housing, when the government starts subsidizing it, it gets more expensive.
And Bair doesn’t even mention the damage associated with a government policy that actively promotes misallocation of resources into the housing sector.
