Reason Foundation

Recent Research and Commentary

Unmasking the Mortgage Interest Deduction - Update 2012

Who Benefits and By How Much?

December 12, 2012

Anthony Randazzo, Dean Stansel

The federal income tax code is riddled with loopholes, deductions and credits designed to promote various social goals and benefit assorted groups of Americans. One of the largest of these is the mortgage interest deduction (MID), which allowed taxpayers to claim benefits of $82.7 billion in 2010, the latest data available. Given the number of recent proposals to change the MID in some way, it is helpful to review which households are claiming the mortgage interest deduction.

In a new policy summary, Reason Foundation offers a update to the 2011 study "Unmasking the Mortgage Interest Deducton" and takes a look at who is currently benefiting from the MID.

Joint Committee on Taxation data shows households making $100,000 or more a year constitute 55 percent of those claiming the MID, and they receive 78 percent of the deduction’s total benefits. The last two columns of our table of the JCT data show the average tax savings that households in each income group receive from the MID, and what those savings represent in monthly savings. For example, the MID saves middle-class households making between $40,000 and $75,000 a year around $80 a month. The MID is not the middle-class savior it is made out to be.

Study: Time to Eliminate the Mortgage Interest Deduction

Removing homeowner subsidies would allow everyone’s income tax rates to be lowered

July 28, 2011

The mortgage interest deduction does not increase homeownership rates and amounts to little more than a subsidy for wealthy homeowners, according to a new Reason Foundation study that recommends eliminating the deduction and streamlining the tax code. The Reason Foundation report suggests a revenue-neutral solution: eliminate the mortgage interest deduction and lower federal income tax rates for all Americans by 8 percent.

"The mortgage interest deduction subsidizes and rewards wealthy people for buying expensive houses they would've purchased anyway," said Anthony Randazzo, director of economic research at Reason Foundation and co-author of the report. "The deduction is used almost exclusively by people in the top income brackets with large mortgages. Renters, along with lower- and middle-class families, are getting a raw deal. Taxpayers and the economy would be best served by ditching the mortgage deduction and lowering overall tax rates."

The mortgage interest deduction was used on about a quarter of all tax returns filed in 2009. But the Reason Foundation report shows the home mortgage deduction was used on 73 percent of tax returns filed by those with incomes over $200,000 that year. The average tax savings for those homeowners: $2,221. In contrast, just 5.5 percent of tax returns filed by those making $20,000 to $30,000 used the mortgage interest deduction in 2009, with no significant tax savings. Thirteen percent of tax filers making between $30,000 and $40,000 used the mortgage deduction. Their tax savings was a paltry $96. And 23 percent of tax returns with incomes between $40,000 and $50,000 used the mortgage interest deduction, with an average tax savings of just $114.

New Study: Unmasking the Mortgage Interest Deduction

July 28, 2011, 9:00am

The mortgage interest deduction does not increase homeownership rates and amounts to little more than a subsidy for wealthy homeowners, according to a new Reason Foundation study that recommends eliminating the deduction and streamlining the tax code. The Reason Foundation report suggests a revenue-neutral solution: eliminate the mortgage interest deduction and lower federal income tax rates for all Americans by 8 percent.

Unmasking the Mortgage Interest Deduction

Who Benefits and By How Much?

July 28, 2011

Anthony Randazzo, Dean Stansel

The deduction of mortgage interest from federal income taxes subsidizes homeownership, making it more affordable to become a homeowner. Or so we've been told. It is a highly popular tax break, yet one that is not without criticism. For example, it turns out the mortgage interest deduction (MID) primarily benefits those who would choose to own homes anyway while encouraging them to simply buy bigger and more expensive homes. Those who are on the margin between renting and owning tend not to itemize deductions, thus they cannot benefit from the MID. As a result, if the goal is to increase the homeownership rate, the MID is an ineffective tool. Furthermore, it creates a distortion in the choice between financing owner-occupied housing with debt or other assets, and in the choice between investing in residential real estate or other assets.

Despite its popularity among voters, the mortgage interest deduction has long been a target for elimination. Most recently, President Obama’s deficit reduction commission (Simpson-Bowles) had it in its sights. While there is general sentiment among voters that the mortgage interest deduction is a good idea, there is little understanding of its impact. In order to understand the potential impact of closing this loophole, this study examines specifically who benefits from the MID and how much they benefit. It also provides an estimate of how much tax rates could be reduced if the deduction were eliminated but revenues were held constant as well as a discussion of other possible changes to the mortgage interest deduction.

More on the Housing Bubble and the Politics of Land Use Planning

June 15, 2011, 1:27pm

Samuel Staley

Wendell Cox's recent study on how planning caused the housing bubble is getting well deserved press because it highlights how planning reduces the dynamism of housing markets by politicizing the process.

Housing Finance Reform: Protecting Taxpayers, Ending Bailouts, Reducing the Government’s Role, and Promoting Private Capital

Testimony Before the U.S. House of Representatives Committee on Financial Services Subcommittee on Capital Markets and Government Sponsored Enterprises

February 9, 2011

Anthony Randazzo

It is important, at the outset of this debate, to frame the issue properly: mortgage finance policy and affordable housing policy are two different things. Whether we should or how to subsidize low-income Americans putting a roof over their heads must not cloud the analysis and debate about the consequences of government policy distorting mortgage prices for nearly the entire housing market. Separating mortgage finance from affordable housing is important to shed light on what policy options can best be pursued to prevent another artificially-induced boom and catastrophic bust. 

That being said, now is the time for major reform of the government's role in the mortgage finance market. The housing boom and bust of the last decade is the main source of our recent economic crisis, lethargic recovery, persistent unemployment, and the massive wave of foreclosures. Yet, the past two Congresses have failed to reform America's housing finance system. It seems the time is never right to make serious, much needed changes. When the market was going strong, no one wanted to derail the train. And with the market weak, it's been argued that the government is needed to get housing back on track. This Congress must resist the urge to maintain the status quo.

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