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Monday, Apr 8, 2013 3:09 PM UTC

When tax breaks are useless

The mortgage interest deduction, which costs the treasury $70 billion, subsidizes already-payable home purchases

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Topics: On the Economy, Mortgage Interest Deduction, Taxes, Congress, Will Fischer, ,

When tax breaks are useless (Credit: Wikimedia/Eliot.P)
This originally appeared on Jared Bernstein's blog, On the Economy.

There are a lot of people running around DC these days talking about closing tax loopholes.  But when you push them on specifics, most are hard pressed to say which ones.

Though I name names in recent testimony on the topic, I’m sympathetic.  Your loophole is my treasured job-creation program without which the economy will collapse.

So we need some criteria by which to judge what should stay and what should go.  In the link above, I argue for a 3-step test involving revenue forgone, efficiency, and fairness.  Someone suggested adding political feasibility, which makes sense, though given the state of Congressional gridlock, that could shut down the whole enterprise.

Anyway, these thoughts came to mind when I saw the graph below from my CBPP colleague Will Fischer (here’s the post from which I plucked it).  It’s about the mortgage interest deduction (MID), and to my eyes, it’s a picture of an expensive, inefficient, and unfair tax break.

Fischer lines up the billions in tax payments forgone by income class next to a measure of housing cost burden, defined as the number of households that pay more than half of their income for housing.  If economic need were the motivation for the MID, you’d expect the two sides of the graph to correlate.  But they don’t even come close.

The bulk of the deduction’s benefits go to higher-income households who generally could afford a home without assistance:  in 2012, 77 percent of the benefits went to homeowners with incomes above $100,000.  Meanwhile, the deduction provides little benefit to the middle- and lower-income families who are most likely to struggle to afford homeownership (see chart) — and no benefit at all to more than a third of homeowners with mortgages.

The MID is widely believed to subsidize home purchases that would mostly have been made anyway, so it scores high on the inefficiency criterion.  And since it costs the Treasury about $70 billion a year in forgone revenue, it’s expensive.  As the figure shows, it’s distributionally upside down, so it scores no higher on fairness.   In fact, it’s a trifecta loser on my three original criteria.  Of course, once if you add in political feasibility, it’s a much tougher call, though Fischer points out that numerous analysts have proposed reforms that mend the MID without ending it.

 

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Jared Bernstein joined the Center on Budget and Policy Priorities in May 2011 as a Senior Fellow. From 2009 to 2011, Bernstein was the Chief Economist and Economic Adviser to Vice President Joe Biden. Follow his work via Twitter at @econjared and @centeronbudget. More Jared Bernstein.

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